Jessica Lerner

Wednesday's CPI report will "shed more light on the path of inflation and the potential timing for rate cuts this year," said Cooper Howard, a fixed income strategist at Charles Schwab.

Muni to UST ratios also continue to rise across the curve, inching closer to more normal averages.

Some buying returned to the market Thursday from the buy-side and asset managers as dealers attempted to sell bonds, said Chris Brigati, senior vice president and director of strategic planning and fixed income research at SWBC.

Two mega deals recently priced with make-whole calls for bonds due in 2034 and shorter where the market does not appear "to be penalizing issuers for including an optional make whole call feature in the short maturity tax-exempt bonds," said Pat Luby, head of Municipal Strategy at CreditSights, in a report.

"Most spots on the muni AAA HG curve are at or near year-to-date highs, and the muni HG curve showed significant underperformance across the curve in March, relative to the broader fixed income market, after sizable muni outperformance in February," said J.P. Morgan strategists.

Before Tuesday's selloff, muni yields have been rising over the last several weeks due to "outsized" new-issue supply, said Anders S. Persson, Nuveen's chief investment officer for global fixed income, and Daniel J. Close, Nuveen's head of municipals.

The uptick in supply amid tax season has led to a short-end correction and higher muni to UST short ratios, but the levels are still rather rich from a historical perspective.

March issuance came in at $36.405 billion, above the $34.579 billion 10-year average, according to LSEG Refinitiv data. 

LSEG Lipper reported fund inflows of $447 million while high-yield muni bond funds saw another round of inflows at $246 million, marking the 12th consecutive week of positive flows in that space.

Most of the selling during tax season happens on the front end of the curve, said Wesly Pate, senior portfolio manager at Income Research + Management.

Absolute yields "remain attractive in the context of the trading range over the past three years and our longer-term projections for lower rates this year," according to J.P. Morgan strategists.

The onslaught of new-issuance and approaching month- and quarter-end led triple-A yields to rise up to seven basis points on the short end and as much as three to five elsewhere along the curve, despite stronger U.S. Treasuries. Short ratios rose as a result.

The UC Regents will close the books on its $1.1 billion refunding deal that included the refunding BABs Wednesday. Investors do not appear to be penalizing the issuer in secondary trading as spreads have stayed at or near the original pricing.

This week's new-issue calendar grows and includes some "common benchmark names like CA GO, NYC GO, and WA GO," Birch Creek strategists said.

The calendar is led by several high-profile deals, including $2.7 billion of GOs from California, $1.5 billion from New York City and $1.1 billion from Washington. High-yield gets another dose of unrated project finance debt from Miami Worldcenter Project tax increment revenue bonds. The Bond Buyer 30-day visible supply sits at $12.06 billion.

Hallam will handle high-yield muni sales and trading, focusing on large institutional accounts at the firm.

The Washington refunding deal is built on an extraordinary optional redemption of Build America Bonds despite criticism from investors who hold them.

The extraordinary redemptions being used to call Build America Bonds "are based on a creative but flawed legal argument driven by the current change in interest rates," said Kramer Levin partner Amy Caton.

Citi's exit comes amid the larger trend of broker-dealers downsizing balance sheets, which can hurt secondary market liquidity, particularly in times of stress. Other market players are coming into the fold.

"The balance of March may continue to be better-than-expected, particularly given existing demand and decent reinvestment needs over the next 30 days," according to Oppenheimer's Jeff Lipton.