Jessica Lerner

Municipals are underperforming USTs month-to-date, with the Bloomberg Municipal Index showing losses of 1.02% versus 0.92% for USTs as of Tuesday, but both are outperforming losses in corporates that are seeing 1.23% losses in January.

Airys puts "local governments in a position of knowledge and, therefore, action," said Columbus, Ohio, City Auditor Megan Kilgore, an advisor to the students.

"Even though it will be priced to sell, such large supply in one week may be a struggle for the asset class," said Anders S. Persson, Nuveen's chief investment officer for global fixed income, and Daniel J. Close, Nuveen's head of municipals.

Trading in Los Angeles credits has become more volatile. An L.A. Department of Water and Power deal slated for Wednesday went day-to-day.

The muni market also faces an elevated new-issue calendar, which may put additional pressure on muni yields. Bond Buyer 30-day visible supply sits at $17.57 billion.

Sizable deals for next week include $1.3 billion of real estate transfer tax revenue bonds from the Triborough Bridge and Tunnel Authority and $996.335 million of second series revenue bonds from the San Francisco International Airport.

The Federal Reserve will be more cautious and slow rate cuts going forward, according to minutes of the December Federal Open Market Committee meeting, released Wednesday.

"Further Treasury rate volatility or distractions from more favorable alternatives could at the very least moderate money invested into the municipal bond market," DWS strategists said. However, "these dynamics could create periods of opportunity to buy tax-exempt bonds at attractive yields in 2025."

"These opportunities will surface periodically throughout the year against heavy supply and the increasingly uncertain path for the Fed, evolving fiscal policy, and volatile Treasury market backdrop," said J.P. Morgan strategists.

Heavy redemptions and coupon payments this month should help "stabilize" the market, said Barclays strategist Mikhail Foux.

The muni market saw $507.585 billion of debt issued in 2024, up 31.8% from $385.061 in 2023. This surpasses the previous record of $484.601 billion in 2020 by more than $20 billion, per LSEG data.

Both IG and HY indices will likely end this year richer versus USTs and their benchmarks, "leaving very little cushion to absorb rate volatility," said Barclays strategist Mikhail Foux.

High-yield funds saw outflows of $413.6 million compared to the previous week's outflows of $71 million.

In the remaining days of this year, "taxable rates continue to be pressured but munis are finding a stable, even supportive, bidside," said Kim Olsan, a senior fixed income portfolio manager at NewSquare Capital.

Munis "continued their slide" last week as yields rose an average of 23 basis points across the curve as the Fed Chairman Jerome Powell signaled the Fed will take a "more cautious approach" on interest rate cuts next year, said Jason Wong, vice president of municipals at AmeriVet Securities.

"Munis are grappling with a storm of uncertainty," said James Pruskowski, chief investment officer at 16Rock Asset Management.

It's hard enough convincing local governments to spend money on cyber insurance that covers ransomware attacks, said Omid Rahmani, public finance cybersecurity lead at Fitch Ratings. The new and very specific threat of a hacked financing process, is "absolutely" underappreciated by the public finance industry.

As the market prepares for 2025, there's a lot of uncertainty around what the new administration will mean for the macroeconomic environment and interest rates, the latter of which may be impacted by policy around the deficit, said Steve Shutz, portfolio manager and director of tax-exempt fixed income at Brown Advisory.

With investors now anticipating Wednesday's expected rate cut may be the last one for a while, "an overall bullish paradigm has been seriously weakened," noted Matt Fabian, a partner at Municipal Market Analytics, Inc.

As investors start shutting down for the year, there may be some mixed sessions ahead "especially for any accounts that find themselves as forced sellers," Birch Creek Capital said.