Muni yields ticked down Thursday as U.S. Treasuries saw gains and equities ended mixed.
The two-year muni-UST ratio Thursday was at 59%, the five-year at 59%, the 10-year at 63% and the 30-year at 90%, according to Municipal Market Data's 3 p.m. EDT read. The two-year muni-UST ratio was at 59%, the five-year at 58%, the 10-year at 62% and the 30-year at 89%, according to ICE Data Services.
The muni market had a "nice start" this year after several factors "rocked" the market last year, including tax policy uncertainty over the reconciliation bill and record supply. The latter altered performance and weighed on relative performance, certainly at the longer end of the curve, said R.J. Gallo, deputy CIO of global fixed income at Federated Hermes.
However, over the last six months of 2025 and into this year, munis staged a "powerful rebound," he said.
Muni-UST ratios out to 10-years are in the high 50s to low 60s, Gallo noted.
"Typically, when you get to that level, it's hard to argue that munis look attractive or cheap; they start to look sort of rich. But investors seem to be gobbling them up," he said.
Flows have been strong into open-end funds, while separately managed accounts continue to bring a lot of money in, with strong demand from investors, per Gallo.
Part of these massive inflows comes from "some reallocation out of equities, which have done great, and into bond portfolios and to include munis," he said.
This has "allowed the market to trade to the richer side, certainly for intermediate and shorter securities," Gallo said.
The market as a whole has been "somewhat reticent" to buy the very long end of the curve, he said.
The 10s30s slope of the curve remains relatively steep at around 160 basis points, compared to around 100 basis points at this time last year, according to Gallo.
"We have not seen necessarily the same bid to very long duration as you have seen intermediate and short," he said. "It's pretty clear that by the markets' price action and by both the reported mutual fund flows and the anecdote, demand is strong, but it's been stronger in intermediate- and short-term securities."
That does not mean the long end is "untouchable," but there may be some factors that explain why there is less demand in that part of the curve, he said.
For one, investors may remain "stung" that longer bonds are inherently more price risky, Gallo said.
In 2022 and parts of 2023, there were some difficult adjustments to the high-inflation, Fed-hiking environment, and "they just might not be as eager to go out the curve," he said.
The market is very liquid. In the past, there have been periods when the market has gotten "very choppy," and liquidity has been poor, but that is not the case right now, Gallo said.
The secondary market is functioning very well, with broad participation, he said.
Exchange-traded funds, in some ways, helped to support that liquidity through the "creation redemption process that underlies how ETFs may shrink or expand with investor activity. That, in and of itself, brings more secondary market trading, maybe to a broader swath of bonds than would have experienced good liquidity in other periods of time, when ETFs weren't as nearly as large," Gallo said.
New-issue market
In the primary market Thursday, BofA Securities priced for Lee County, Florida, (A2//A/AA-/) $642.64 million of airport revenue bonds. The first tranche, $432.11 million of Series 2026A-1 AMT bonds, saw 5s of 10/2034 at 3.07%, 5s of 2036 at 3.31%, 5.25s of 2041 at 3.73%, 5.25s of 2046 at 4.29%, 5.5s of 2051 at 4.57% and 5.5s of 2056 at 4.65%, callable 10/1/2036.
The second tranche, $164.145 million of Series 2026-A2 AMT put bonds, saw 5s of 10/2056 with a tender date of 10/1/2031 at 3.03%, callable 7/1/2031.
The third tranche, $46.385 million of Series 2026B non-AMT refunding bonds, saw 5s of 10/2032 at 2.44% and 5s of 2036 at 2.84%, noncall.
In the competitive market, Clark County School District, Nevada, (A1/AA-//) sold $300.145 million of GO building and refunding bonds, Series 2026A, to J.P. Morgan, with 5s of 6/2027 at 2.15%, 5s of 2031 at 2.31%, 5s of 2036 at 2.84%, 5s of 2041 at 3.44%, and 4s of 2046 at 4.30%, callable 6/15/2036.
Fund flows
Investors added $1.029 billion to municipal bond mutual funds in the week ended Wednesday, following $1.269 billion of inflows the prior week, according to LSEG Lipper data. This is the seventh time in eight weeks that inflows have topped $1 billion.
High-yield funds saw inflows of $455.4 million compared to inflows of $303.9 million the previous week.
Tax-exempt municipal money market funds saw inflows of $1.985 billion for the week ending Feb. 23, bringing total assets to $144.552 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds was 1.91%.
Taxable money-fund assets saw $795.8 million added, bringing the total to $7.614 trillion.
The average seven-day simple yield was 3.37%.
The SIFMA Swap Index was at 1.88% on Wednesday compared to the previous week's 2.22%.
AAA scales
MMD's scale was bumped up to one basis point: 2.03% (unch) in 2027 and 2.04% (-1) in 2028. The five-year was 2.11% (-1), the 10-year was 2.52% (unch) and the 30-year was 4.19% (-1) at 3 p.m.
The ICE AAA yield curve was bumped up to two basis points: 2.05% (unch) in 2027 and 2.04% (-2) in 2028. The five-year was at 2.10% (-1), the 10-year was at 2.50% (-1) and the 30-year was at 4.16% (-2) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped up to a basis point: The one-year was at 2.03% (-1) in 2027 and 2.05% (-1) in 2028. The five-year was at 2.12% (unch), the 10-year was at 2.51% (unch) and the 30-year yield was at 4.18% (-1) at 3 p.m.
Bloomberg BVAL was bumped one basis point: 2.04% (-1) in 2027 and 2.03% (-1) in 2028. The five-year at 2.08% (-1), the 10-year at 2.48% (-1) and the 30-year at 4.05% (-1) at 4 p.m.
U.S. Treasuries saw gains.
The two-year UST was yielding 3.443% (-3), the three-year was at 3.451% (-4), the five-year at 3.578% (-5), the 10-year at 4.015% (-4), the 20-year at 4.605% (-4) and the 30-year at 4.664% (-4) near the close.
