Finance

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.

The NFMA has floated best disclosure practices for public power agencies that ask for more data on climate and resiliency goals.

Analysts warn the many one-time measures in the budget Mayor Brandon Johnson narrowly got through City Council will make the 2026 budget even harder.

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.

Overall state and local government credit conditions will remain neutral, Fitch Ratings says, though some storm clouds may be on the horizon.

Supply falls ahead of the final Federal Open Market Committee meeting of 2024 and the holidays but issuance still breaks records. The lighter calendar should provide support for the secondary market in the final weeks of the year.

Muni mutual funds saw outflows after 23 weeks of inflows as LSEG Lipper reported investors pulled $316.2 million for the week ending Dec. 11. High-yield municipal bond funds, though, saw inflows of $192.3 million.

Most on the Street expect issuance to come in around $500 billion, but a few think volume will be much higher, primarily because of potential changes to the tax exemption. Most firms expect refunding volumes to also grow in 2025.

Municipal investors are more focused on the final new-issues coming down the pike and repositioning books as 2024 heads to a close. ICI reported another week of inflows into municipal bond mutual funds.

"With strong demand, rate cuts and favorable technicals, the muni market — outside of an unexpected shock — is set up to perform well over the next couple of months," said Daryl Clements, a municipal portfolio manager at AllianceBernstein.

The rating agency cited an easing of the state's fiscal challenges for lifting the outlook on the state's Aa2 rating to stable from negative.

Munis are in the black so far this month, with the Bloomberg Municipal Index at +0.33% in December and +2.88% year-to-date, the high-yield index is at +0.27% in December and returning 8.41% in 2024, while taxable munis are returning 0.43% so far this month and 4.58% in 2024.

Investors will be greeted with a diverse new-issue slate the week of Dec. 9, led by bellwether names. If all the deals price, 2024's total should break 2020's record by the end of the week. Despite rich valuations, demand has remained strong as the year winds down.

S&P Global Ratings released a report this week warning that the credit trajectory of the Chicago Board of Education will hinge on several contested factors.

High-yield municipal bond funds saw inflows of $534.1 million compared to $300.6 million compared the previous week, per LSEG Lipper data.

Technicals could "break down" if there is a potential decline in risk assets or rising unemployment, particularly in white-collar jobs, said Jeff Timlin, a managing partner at Sage Advisory.

Muni investors hope "any move toward higher yields is steady, even dignified, such that it doesn't catalyze an outflow cycle that would countervail year-to-date total returns just before we close out the year," said Vikram Rai, head of municipal strategy at Wells Fargo.

Munis ended November in the black with the asset class seeing gains of 1.73% for the month, pushing year-to-date returns to 2.55%.

With an estimated $13 billion calendar on tap, demand for paper will be bolstered by the $16 billion of redemptions coming Monday while mutual fund inflows, this week at about $560 million and concentrated in the long-end, signal solid investor support. Munis are returning 1.73% in November as of Friday.