Municipals were mixed in Thursday trading while U.S. Treasury yields fell and equities rallied, largely ignoring the Federal government shutdown and the likely loss of key macroeconomic indicators as a result of it.
Triple-A muni yields rose slightly on the short end on some scales while USTs saw small gains across the curve.
The two-year muni-UST ratio Thursday was at 66%, the five-year at 63%, the 10-year at 71% and the 30-year at 90%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 64%, the five-year at 63%, the 10-year at 71% and the 30-year at 90% at a 3 p.m. read.
Municipal bond mutual funds returned to inflows as investors put $1.108 billion into the funds in the week ended Wednesday, compared to $28.9 million of outflows the week prior, according to LSEG Lipper data.
High-yield funds saw another week of inflows with $478.1 million over last week's $133.7 million.
This week marks a ninth week of inflows over the last 11, and the 20th week of inflows in the last 23, per J.P. Morgan, which noted that on a combined basis — open-end funds and ETFs — flows were uniformly positive across all categories, save for short/intermediate funds, which were negative $13 million.
September was "a turnaround month for municipals," aided by both a Federal Reserve rate cut and "growing recognition of the comparative value in the asset class," said Kim Olsan, senior fixed income portfolio manager for NewSquare Capital.
Olsan highlighted high-grade municipals earned 2.3% in September, which brings year-to-date returns to 2.6%. GOs and revenue bonds "hold comparable annual returns, as buyers have become less enthusiastic about specific revenue sectors on narrow credit spreads," she said.
Another noteworthy thread was "the strength in the long end after lagging shorter maturities in recent months," Olsan said, adding that a "long-dated index gained 4.0%, well surpassing a near-0% gain for 1-2 year index."
"Trade allocations turned around post-rate cut as further Fed actions raised expectations that the curve could flatten (which it has) and real yields will fall in coming months," she said.
At the top of the month, long-term AAA yields were above 4.50% but to date have fallen to roughly 4.25%, Olsan noted.
Furthermore, various revenue sectors turned out "meaningful performance" last month, with Healthcare leading the pack up 2.8% but still behind the broader market for the year, Olsan said.
"Although the new tax law may affect revenue models with reduced funding to Medicaid/Medicare, the offset has been a drop in supply," she said. "Last month's issuance in the category barely surpassed $1 billion among $100 million or larger issues, and with a shorter maturity focus."
Taxable munis saw a "mid-month rally" but "wound up reversing course by the close of September," closing out with a "1.2% gain (100 basis points below the main tax-exempt index) but have gained more than 6.0% this year," Olsan said.
For the month ahead, "the upcoming challenge for munis is a heavy bias toward negative returns with mismatched redemptions against projected supply," she said.
Elsewhere, the government shutdown has taken hold and is poised to "elevate market uncertainty" as "credit implications for the muni market can become more acute the longer the shutdown lasts," said Jeff Lipton, municipal market intelligence analyst for The Bond Buyer.
"As it stands, futures contracts are pricing in a 90%+ certainty of a 25 basis point rate cut, and any threats to economic growth would only add further justification to the policy movement and inspire [Federal Reserve] Chair Powell's post-meeting presser," Lipton said.
He noted that while the "shorter end of the muni curve could see downward yield movement in sync with the Central Bank's expectations," the long-end "tethered to the disruptive forces of D.C. activities" could react oppositely with "heavier upward yield pressure."
"Nevertheless, while the shutdown will eventually be resolved, present circumstances may catalyze tactical investment opportunities as a way to capture even more compelling yield and income opportunities," Lipton added.
AAA Scales
MMD's scale was unchanged: 2.38% (unch) in 2026 and 2.30% (unch) in 2027. The five-year was 2.32% (unch), the 10-year was 2.91% (unch) and the 30-year was 4.21% (unch) at 3 p.m.
The ICE AAA yield curve saw small cuts: 2.36% (+1) in 2026 and 2.29% (+2) in 2027. The five-year was at 2.31% (+1), the 10-year was at 2.91% (unch) and the 30-year was at 4.23% (unch) at 3 p.m.
The S&P Global Market Intelligence municipal curve was cut on the short end: The one-year was at 2.39% (+3) in 2025 and 2.29% (+3) in 2026. The five-year was at 2.30% (unch), the 10-year was at 2.91% (-1) and the 30-year yield was at 4.21% (unch) at 3 p.m.
Bloomberg BVAL was cut on the short end: 2.29% (+2) in 2025 and 2.25% (+1) in 2026. The five-year at 2.28% (unch), the 10-year at 2.88% (-1) and the 30-year at 4.21% (-1) at 3 p.m.
In the primary market Thursday, Jefferies priced for Hays County, Texas, (/AA+/AA+/) $187.06 million of combination tax and revenue certificates of obligation, with 5s of 2/2026 at 2.58%, 5s of 2030 at 2.50%, 5s of 2035 at 3.05%, 5s of 2040 at 3.78%, 5s of 2045 at 4.26% and 5s of 2050 at 4.48%, callable 2/2035.
Loop Capital Markets priced for Riverside County, California, (Mig 1//F1+/) $148.165 million of Teeter Plan-issue obligation notes, Series 2025A, priced at par with 2.55s of 10/2026.
