September 2026

Insights & Observations

Economic, Public Policy, and Fed Developments

• August was bookended by two very different jobs reports that ultimately did little to change the prevailing “low-fire, low-hire” narrative. July’s labor report was bad, with a net loss of 23k jobs falling well short of expectations for a gain of +82k, coupled with significant downwards revisions. Large detractions from public education appear to be seasonal, and average hourly earnings remained positive at +0.1, suggesting the labor market was not in free fall. But this report ended the strengthening employment consensus.
• August’s, meanwhile, was the inverse of July; +162k new jobs nearly triple the consensus +55k, with positive prior period revisions. Average hourly earnings were revised up, as well; they had been nearly flat since March, but post-revision, remain soft, yet much better. And, after more than a year of steady declines, we saw a large upwards jump in the Household Survey’s estimate of the workforce. The average workweek also rose a tenth above its recent 34.2-34.3 range. The net picture would be little changed for those not seeing a report since June, but some of the details look more encouraging.
• July’s CPI report, released in August, was interesting in that while gas prices rose steadily, BLS’s use of an average of daily prices to calculate gas price inflation led to a detraction as the monthly average was lower than June. The upwards trend makes a large energy contribution more likely in August, however. Gas prices alone should contribute about 0.12 points to CPI, which risks the split between headline and core coming in larger than the 0.2% the current consensus of +0.4% and +0.2% implies.
• A weak retail sales report during a period of rising gas prices suggests pressure at the pump is weighing on consumer spending and core inflation may be light. Retail sales contracted -0.6% vs. expectations for +0.1%. Prime Day moving forward from July to June has been cited by analysts as a factor. This wasn’t a surprise though, and we think this report reflects more deal-driven spending pull-forward than expected and less incremental new spending. Walmart’s earnings call in late August suggested as much, referencing customers as increasingly deal-focused. This supports our view that higher gas prices are containing rather than boosting core inflation. Fed Chair Kevin Warsh has suggested the 2Yr UST’s rise was “the market doing the work” for the Fed. Instead, it may be the gas pump.
• Treasury Secretary Scott Bessent announced two major changes last month. First, the Treasury “at least doubled” long duration note buybacks from $2 billion. With 85% of current issuance maturing one year and in, this is effectively a modest form of yield curve control, with the Treasury simultaneously buying long and selling short.
• Bessent also indicated that the Treasury will begin purchasing longer-dated issues using its Treasury General Account (TGA), effectively the government’s checkbook. Standing at $935 billion as of 8/20, this could be a significant source of demand for Treasuries, although it poses two risks. Because this account is held outside of the banking system, using it to fund purchases is a QE-like source of liquidity injection at a time when inflation is simmering above target. And the TGA’s size is also generally around $950 billion, but during federal shutdowns it becomes the government’s primary source of funding and is drawn down. Significant Treasury holdings here would make the US Government a large net seller of Treasuries at a politically costly time. After initially falling on both headlines, yields retraced and are now higher than before the announcements.

Sources: Bureau of Labor Statistics, U.S. Census Bureau

From the Trading Desk

Municipal Markets

• After July’s substantial repricing, August delivered some stability to the municipal market, particularly for maturities out to 10 years on the curve. This is despite Treasury yields being whipsawed by geopolitical and Fed-driven headlines.
• The municipal curve steepened in August with the front-end moving lower and maturities 12-years and out pushing higher in yield. Specifically, 1 to 5-year yields fell by 7bps, with the 7-year part of the curve dropping 5bps, the 10-year remaining flat, and 15 to 17-year yields increasing 13 to 17bps. The long end closed the month higher by 9bps.
• Diverging yield directions added 10bps of steepness to the 2-10s slope and 18bps to the 10-15s slope. The front-end slope stayed anchored as 2-5s closed the month at 31bps and we now see more attractive yield pick-up for duration extension within a relatively narrow maturity spectrum.
• Ratios moved in sync with yields as front-end ratios outperformed and tightened while longer ratios got cheaper in the face of Treasury volatility. Specifically, the 2-, 3- and 5-year ratios tightened by 2.2 to 2.9%, the 7-year got richer by about 1.4%, the 10-year was largely unchanged, and 20 to 30-year ratios moved wider by 2-3%. AAA Muni/UST ratios of 5-yrs and longer closed the month north of 60%, while the 10-year ratio revealed considerable value at 71%.
• According to JP Morgan, August set a record for new long term tax-exempt supply with $57.6B of issuance, surpassing the previous high set in October ’24 and becoming one of just 6 months to see issuance surpass the $50B mark.
• As the pace of supply set records, municipal fund subscriptions helped steady the market. Barclays reported that $6.5 billion came into municipal funds, with the largest inflows targeting national mandates, ETFs, and long-term funds.

Corporate Markets

• Demand for Investment Grade Credit remains very strong, and a favorable technical backdrop has allowed spreads to remain in check. The YTD range has stayed narrow, with just 22bps separating the high and low. The Bloomberg US Corporate Index month-end OAS of 77bps is exactly where we began 2026 and only 3bps below the year’s 80bps average. Last year wasn’t much different as the market has operated in a tight range with nominal credit risk premiums for some time. 
• August saw record-setting issuance, with $163 billion of new debt coming to market. The previous August record of $136 billion was set in 2020. It’s worth noting that January, June, and July were all record setters, reflecting a very favorable environment for companies to raise debt. An historic AI capital expenditure boom is driving a good deal of Investment Grade offerings, although financials and utilities have also been active.
• Market participants are becoming more selective given today’s tight range in credit spreads. While the funding landscape for most issuers remains healthy, order attrition on many deals has been evident as issuers grapple with comparative UST rates. 
• The UST curve has moved in a bear flattening manner with short rates recently selling off faster than longer-dated bonds. This dynamic has been impacted by a more hawkish Fed tone and growing expectations of near-term rate hikes. Intermonth volatility has been evident for that reason, along with sustained Middle East conflict, and the Treasury’s announcement that it would expand its buyback capacity of longer-dated bonds. The latter is aimed at pushing down longer maturity yields although that has not been the result to date.
• On August 12^th Treasury auctioned off $42B of 10Yr notes at 4.68%, the highest level since 2007. The 30Yr auction posted a yield not seen since 2001 on the following day and hit an intramonth high of 5.31%. An elevated term premium is evident as investors are pricing in inflationary pressures, lack of fiscal discipline, and a Fed Funds rate hike in September.

Sources: Bloomberg, Bond Buyer, Barclays, JP Morgan, and Lipper Inc.

Public Sector Watch

US Public Finance Rating Revisions Reveal a Cautious Credit Outlook

• The combined Moody’s and S&P upgrade-to-downgrade ratio was 0.7-to-1 during Q2 2026. In aggregate, the leading credit agencies upgraded 223 ratings and downgraded 314. This represents a meaningful decline from Q1 when there were 335 upgrades and 290 downgrades, reflecting modestly negative public credit momentum.
• S&P’s ratio was slightly weaker than Moody’s, with an upgrade-to-downgrade balance of 0.6-to-1. Moody’s ratio was 0.8-to-1, with 114 upgrades and 139 downgrades. The Moody’s upgrade-to-downgrade ratio has exceeded that of S&P 10 of the last 12 quarters, suggesting Moody’s has maintained a somewhat more constructive view of municipal credit quality.
• Moody’s public finance ratings turned modestly negative in Q2 2026, with 116 downgrades to 96 upgrades. Notably, Moody’s recorded 25 multi-notch downgrades, up from 17 in the prior quarter, the highest level since Q3 2018. School districts accounted for 17 of those multi-notch downgrades, highlighting the growing credit pressure within the education sector.
• K-12 school districts were the primary driver of downgrades, accounting for more than half of all rating cuts. The sector has now experienced five consecutive quarters of more downgrades than upgrades. Challenges facing school districts include growing competition from charter schools and private school choice programs, declining school-age populations in many regions, and the need to adjust spending as federal pandemic relief funding expires. Many districts expanded staffing levels, programming, and operating budgets during the pandemic funding period and are now being forced to realign expenditures with recurring revenue sources. Despite these pressures, only about 3% of rated school districts were downgraded during the first half of 2026.
• Higher Education also continued to experience more downgrades than upgrades, and the not-for-profit healthcare sector registered more downgrades than upgrades for the first time since Q3 2025. Healthcare downgrades were generally concentrated among organizations facing elevated labor costs, margin pressure, and weaker-than-expected volume recovery.
• State credit quality remained stable overall, with no rating changes. Notable outlook revisions included Kansas receiving a positive outlook and the District of Columbia being revised to stable, while Washington and Missouri were revised to negative outlooks. A lack of state downgrades reflects the benefit of historically strong reserve levels, healthy liquidity, and conservative budgeting practices.
• Underlying public finance fundamentals remain supportive, benefiting from stable employment, resilient tax revenues, and generally conservative fiscal management. As a result, rating activity remains significantly more stable than during prior periods of economic volatility despite a modest increase in negative actions.
• The cautious collective credit tone expressed by S&P and Moody’s emphasizes the importance of disciplined security selection and underscores the importance of research to Appleton’s investment process, as the dynamic municipal market demands a diligent approach grounded in in-depth credit analysis and a comprehensive understanding of the macroeconomic environment.

Sources: Bank of America, Moody’s, S&P and JP Morgan

This commentary reflects the opinions of Appleton Partners based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information. Any securities identified were selected for illustrative purposes only, as a vehicle for demonstrating investment analysis and decision making. Investment process, strategies, philosophies, allocations, performance composition, target characteristics and other parameters are current as of the date indicated and are subject to change without prior notice. Not all products listed are available on every platform and certain strategies may not be available to all investors. Financial professionals should contact their home offices. Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen, or experience. Investments and insurance products are not FDIC or any other government agency insured, are not bank guaranteed, and may lose value.