Munis extended their selloff Thursday, rising in sympathy with UST yields as the asset class gets dragged higher with the rest of the rate world. Equities ended lower.
Muni yields cheapened by 10 to 15 basis points, depending on the scale. UST yields cheapened by seven to 15 basis points.
Since the end of June, long-dated muni yields have risen by upward of 50 basis points, pushing yields to the highest levels since the tariff-induced volatility in April 2025.
Historically, higher yields have been a great buying opportunity, said Adam Congdon, director at Payden & Rygel.
"You might not pick the absolute top, but historically, buying bonds across the coupon spectrum, but in particular, 5% coupons at yields close to 5% will be a great trade, regardless of what happens on a mark-to-market basis," he said.
Thursday's selloff is more of a UST story than a muni-specific story, said Cooper Howard, director of fixed income research and strategy at Charles Schwab.
Munis usually follow USTs, which are under pressure. The UST market is contending with the Federal Reserve and concerns over inflation and the federal deficit, said Chad Farrington, co-head of municipal bond investment strategy at DWS.
Markets are pricing in around a 70% chance of a rate hike at the Federal Open Market Committee meeting next week, per some metrics.
Thursday's producer price index report suggests inflation is rising, and Friday's consumer price index report will make it clearer, Howard said.
If CPI comes in line, like PPI, the 10-year UST yield could rise above 5%, a high last seen in October 2023, said Chris Brigati, managing director and CIO at SWBC.
While most of the move higher in muni yields was driven by UST volatility, there will be some "interesting knock-on effects" in the muni market as it digests this move across the coupon stack. If the entire coupon stack is at a discount, the relative value picture becomes very different, Payden's Congdon said.
The selloff comes as the muni market faces a "hangover effect" from the heavy supply," Brigati said.
Issuance surges to over $15 billion this week, led by a $3.82 billion deal from the Alabama Toll Road, Bridge and Tunnel Authority, the largest deal of the year.
The market's "been digesting supply and putting it away, backing up while doing it, but at least putting bonds away," Brigati said.
Now, it's starting to look like the market may take a step back, he said.
Furthermore, the secondary market, which has been lackluster for the past couple of weeks, is "starting to play more than second fiddle to the primary market, and the buyside is not paying a lot of attention to it, and they're trying to sell into it. So it's kind of a Catch-22: buyers are selling into the weakness and not buying. It's not a good recipe for support by any measure," Brigati said.
"Going forward, we continue to expect that there's going to be elevated supply, and without a matching amount of demand, that's going to probably weigh on total returns," Howard said. "There's probably a floor on how low yields can go due to inflation expectations, the term premium, and then the Fed likely moving into more of a hiking bias rather than a cutting bias."
Fund flows
Investors added $192.8 million into municipal bond mutual funds in the week ended Wednesday, following $138.7 million of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw outflows of $166.2 million compared to inflows of $61.1 million the previous week.
New-issue market
In the primary market Thursday, Wells Fargo priced for the Alabama Toll Road, Bridge and Tunnel Authority $3.82 billion of toll revenue bonds and bond anticipation notes. The first tranche, $571.31 million of first lien toll revenue bonds (Baa2//BBB/), Series 2026A, saw 5s of 1/2047 at 5.35%, 5.25s of 2051 at 5.48%, 6s of 2056 at 5.53%, 5.5s of 2061 at 5.68% and 6s of 2066 at 5.69%, callable 1/2037.
The second tranche, $611.37 million of enhanced third lien toll and project revenue bonds (Aa3//AA-/), Series 2026C, saw 5.25s of 1/2047 at 4.97%, 5.25s of 2051 at 5.13%, 5s of 2056 at 5.28%, 5.5s of 2061 at 5.30% and 5s of 2066 at 5.41%, callable 1/2037.
The third tranche, $85.96 million of taxable enhanced third lien toll and project revenue bonds (Aa3//AA-/), Series 2026D, saw 6.115s of 1/2046 priced at par, callable 1/2037.
The fourth tranche, $2.55 billion of second lien toll revenue bond anticipation notes (Baa3//BBB/), Series 2026-1, saw 5s of 10/2032 at 4.37%, noncall.
Goldman Sachs priced for the Triborough Bridge and Tunnel Authority (A1/AA-//AA/) $774.84 million of capital lockbox fund real estate transfer tax bonds, Series 2026A, with 5s of 12/2027 at 2.74%, 5s of 2031 at 3.26%, 5s of 2036 at 3.89%, 5.25s of 2041 at 4.59%, 5.25s of 2046 at 4.92%, 5.375s of 2052 at 5.125% and 5.5s of 2059 at 5.23%, callable 6/2035.
In the competitive market, Dane County, Wisconsin, (/AAA//) sold $126.31 million of general obligation promissory notes, to J.P. Morgan, with 5s of 6/2027 at 2.80%, 5s of 2031 at 3.23%, 5s of 2036 at 3.79%, 4.5s of 2042 at 4.60%, and 4.75s of 2046 at 4.79%, callable 6/2035.
