Bond markets were little changed Friday and equities rallied as a long-awaited key economic report showed softer-than-expected inflation last month, bolstering expectations for an October rate cut from the Federal Reserve.
The two-year muni-UST ratio Friday was at 70%, the five-year at 66%, the 10-year at 68% and the 30-year at 89%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 69%, the five-year at 66%, the 10-year at 68% and the 30-year at 89% at a 4 p.m. read.
"Investors were not disappointed," said John Kerschner, global head of securitized products and portfolio manager at Janus Henderson. "Inflation came in softer than expected, leading to a tepid bond market rally" and ensuring a rate cut at the upcoming Federal Open Market Committee meeting.
"While investors may have expected a more robust rally given the data, concerns abound in some corners that these numbers are less robust than normal, due to the shutdown," he said.
Instead, the market has focused on Fed governors' speeches, which have trended "dovish," Kerschner said.
Friday's release of the September CPI data provided a rare look into the economy amid the federal government shutdown, BofA strategists wrote. In the absence of data from the Bureau of Labor Statistics, the macro market has operated in a "vacuum-like environment."
The CPI report and "S&P's flash PMIs for October should provide some much-needed insight regarding the state of the economy," BofA added.
BofA analysts don't expect the shutdown to have a material impact on state or local munis, although some governments are more exposed than others, and the effects will be dependent on the shutdown's length and scope.
"Public Housing Authority and Section 8 bonds supported by federal housing payments, bonds supported by federal lease payments on facilities leased by municipal entities to federal agencies, military housing bonds and GARVEEs are more exposed to shutdowns," BofA's analysts wrote.
This is now the largest full shutdown in U.S. history, BofA's strategists wrote, and could reasonably be expected to eclipse the 34-day partial government shutdown in 2019. The shutdown has lasted longer than anticipated, they wrote, and there will be lingering effects.
Overall, states are in fairly good condition, but their rainy-day fund balances are declining, said Barclays strategists.
"Meanwhile, tariffs will start affecting states to a larger degree, especially those with strong manufacturing bases and major coastal ports," they said.
Elsewhere, compared to historical performance in October, tax-exempts have generated solid numbers this month, with investment-grade munis returning 1.29% and the high-yield munis seeing gains of 1.08%, they said.
"Yields of the IG index have already dropped to their recent lows last reached in February, while the HY index has lagged a bit, and the yield differential between the two indices has reached the levels of March 2024," Barclays strategists said.
Despite the long end's strong performance in the past six weeks, they think it still has some "room to run," as it usually does in the last several months of the year.
The muni curve in the zero- to 15-year range has flattened, and the 15- to 30-year range has steepened slightly, BofA strategists said.
"Tax-exempt money market yields climbed more than 40bp since the Fed rate cut in mid-September, which also brought yields in 1-7yr AAA higher. [Seven] to 15 years are in a bull flattening, and 15 to 30 years are in a bull steepening," they said.
"The muni market moves do not seem to suggest there is supply/demand imbalance in the short serial market; rather, it is likely due to investors' overall consensus to extend duration along the curve," BofA strategists said.
During the past four-year bear market, they note "both retail and institutional investors allocated more in the short maturity market, but would extend duration when the market rally became more consistent."
This time, after an October Fed rate cut, short serial yields are expected to come down from current levels, meaning the municurve should have a bull flattening after this month, they said.
New-issue calendar
The new-issue calendar is at $5.367 billion, with $4.085 negotiated deals on tap and $1.281 billion of competitives.
The Chicago Board of Education leads the negotiated market with $1.093 billion of unlimited tax GO refunding bonds.
The competitive calendar is led by Florence, South Carolina, with $143.645 million of combined waterworks and sewerage system capital improvement revenue bonds.
AAA scales
MMD's scale was little changed: 2.53% (unch) in 2026 and 2.44% (+1) in 2027. The five-year was 2.36% (unch), the 10-year was 2.70% (unch) and the 30-year was 4.10% (unch) at 3 p.m.
The ICE AAA yield curve was little changed: 2.50% (+1) in 2026 and 2.42% (+1) in 2027. The five-year was at 2.39% (unch), the 10-year was at 2.73% (unch) and the 30-year was at 4.08% (unch) at 3 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.51% in 2025 and 2.43% in 2026. The five-year was at 2.36%, the 10-year was at 2.71% and the 30-year yield was at 4.08% at 3 p.m.
Bloomberg BVAL was unchanged: 2.48% in 2025 and 2.43% in 2026. The five-year at 2.34%, the 10-year at 2.69% and the 30-year at 4.04% at 4 p.m.
Treasuries were little changed.
The two-year UST was yielding 3.48% (-1), the three-year was at 3.484% (-1), the five-year at 3.599% (-1), the 10-year at 3.996% (-1), the 20-year at 4.554% (flat) and the 30-year at 4.584% (flat) near the close.
CPI
The market was excited to get any economic data, which has been non-existent since the government shutdown began on Oct. 1, but Friday's release of the consumer price index was a ho-hum event for economists, who said inflation remains too high, but with the labor market weakening, the Federal Reserve will continue its easing cycle.
"Right now, the markets are seemingly giving the Fed a pass to cut rates through the end of 2025, and then they will focus on two things: 1) who will succeed [Federal Reserve Chairman] Jay Powell and how dovish will they be and 2) how the economy is faring once market participants actually get to see and analyze real data once again," Janus' Kerschner said.
"We understand that valuations are high and there are risks in the market, but with the Fed cutting rates — and this report does nothing to stop them from a 25-bps cut next week — and corporate profits continuing to increase, it's hard to see an interruption of this year's bull market," said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
While tariffs have raised inflation expectations, causing investors to take bearish positions, he said, "the market is likely to keep squeezing the shorts until they realize that the economy — and corporate America — is more resilient than many expected."
But as Halloween approaches, the September CPI report won't "spook" the Fed, said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, who expects "further easing" at the upcoming Fed meeting.
"A December rate cut also remains likely with the current data drought providing the Fed with little reason to deviate from the path set out in the dot plot," she said.
"This report will clearly keep the Fed on track to cut rates," said Art Hogan, B. Riley Wealth chief market strategist.
"The Fed has been clear that they are more focused on the softening labor data and will continue to defend their full employment mandate, even with core CPI well above their 2% target," he said.
The better-than-expected reading "is good news for the markets," said Jay Woods, chief market strategist at Freedom Capital Markets. Despite CPI climbing to "its highest levels since January," he said, "the Fed's focus seems slanted toward the labor side of its dual mandate."
Although the report could raise eyebrows, it "shouldn't change [the Fed's] current path to cut at the next two meetings," Woods said.
"The troubling thing about the data is that the trend is moving away from their stated 2% goal," he said. "The good news is that while inflation is ticking higher, it is not running away."
Olu Sonola, head of U.S. economic research at Fitch Ratings, said the Fed "will be happy" if inflation stays near 3% in the coming months, meaning the tariff passthrough remains muted. This cut "will be framed as an insurance cut, with hopes that by December the shutdown is over and the Fed has a clearer read on jobs."
"Inflation worrywarts at the Fed will have to answer to the bulk of the FOMC already rallying around the realization tariffs caused less inflation than feared and tariff-related price pressures are already abating under the weight of disinflationary momentum under the surface in categories like shelter and medical care services," said FHN Financial Chief Economist Chris Low.
"The inflation pressures seen in the August CPI report appear to have dissipated in September," said BMO Chief U.S. Economist Scott Anderson. "The Fed now has everything it needs to make a rate cut decision next week despite the dearth of timely economic data due to the federal government shutdown."
Eric Teal, chief investment officer for Comerica Wealth Management, said this "report combined with a weaker job market provides cover for additional rate cuts in 2025 and into next year."
But Gina Bolvin, president of Bolvin Wealth Management Group, said, "Inflation is cooling, but not convincingly enough."
The Fed "will stay cautious," she said. These numbers don't "slam the door on rate cuts, but [they] narrow the path."
"Markets are digesting this as a signal to temper expectations," Bolvin said. "It's not time to chase risk, but it's not time to hide either. Investors should lean into quality names, companies with margin strength, and sectors that can weather stubborn inflation. The Fed's next move will depend on how durable this disinflation trend really is."
Primary to come
The Chicago Board of Education (/BB+//BBB-/) is set to price Tuesday $1.093 billion of unlimited tax GO refunding bonds, consisting of $829.175 million of Series 2025B and $264.035 million of Series 2025C. BofA Securities.
The Virginia Housing Development Authority (Aaa/AAA//) is set to price Tuesday $450 million of commonwealth mortgage bonds, consisting of $75 million of non-AMT Series E bonds, $150 million of taxable Series F bonds and $225 million of non-AMT Series G bonds. BofA Securities.
The Connecticut Housing Finance Authority (Aaa/AAA//) is set to price Tuesday $289.975 million of social housing mortgage finance program bonds, consisting of $20 million of Subseries E-1 bonds and $269.975 million of taxable Subseries E-2 bonds. BofA Securities.
The Colorado Housing and Finance Authority (Aaa/AAA//) is set to price $200.48 million of taxable single-family mortgage Class I bonds, 2025 Series O-1. RBC Capital Markets.
The North Carolina Housing Finance Agency (Aa1/AA+//) is set to price Tuesday $200 million of non-AMT home ownership revenue bonds, Series 59-A. BofA Securities.
The Harris County Cultural Education Facilities Finance Corp., Texas, (/AA//) is set to price Wednesday $200 million of Houston Methodist revenue bonds, Series 2025G. Jefferies.
North Carolina (Aa1/AA+/AA+/) is set to price Thursday $178.375 million of limited obligation refunding bonds, Series 2025B. Wells Fargo.
Clemson University, South Carolina, (Aa2//AA/) is set to price Tuesday $174.635 million of higher education refunding revenue bonds, Series 2025A. Morgan Stanley.
The Glendale Industrial Development Authority, Arizona, (/AA-/AA/) is set to price Tuesday $150 million of Midwestern University revenue bonds. Raymond James.
The California Housing Finance Agency is set to price Wednesday $134.015 million of non-AMT sustainability affordable housing revenue bonds, 2025 Series B. RBC Capital Markets.
Broward County, Florida, (A1/A//) is set to price Tuesday $132.765 million of AMT port facilities revenue bonds. Jefferies.
The River Islands Public Financing Authority Improvement Area No. 3, California, is set to price $112.375 million of Community Facilities District No. 2023-1 special tax bonds. HilltopSecurities.
Competitive
Florence, South Carolina, (Aa2/AA-//) is set to sell $143.645 million of combined waterworks and sewerage system capital improvement revenue bonds, at 11 a.m. Eastern Wednesday.
The Virginia Public School Authority is set to sell $104.75 million of special obligation school financing bonds at 10:45 a.m. Thursday.
Gary Siegel contributed to this story.
