Municipals weakened further Thursday as U.S. Treasury yields fell and equities were mixed.
The two-year muni-UST ratio Thursday was at 72%, the five-year at 72%, the 10-year at 74% and the 30-year at 90%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 70%, the five-year at 71%, the 10-year at 72% and the 30-year at 89% at 3 p.m.
The market has recovered well since the tariff-induced volatility of early April, the most volatile event for the market since 2008, said Dan Genter, CEO of Genter Capital Management.
There has been a "pretty good rally" since mid-April, but the weakness this week was not surprising, he said.
"We're seeing some of the additional instability and other things come into play," Genter said, such as Moody's Ratings' downgrade of the U.S. sovereign credit, the lackluster demand of a $16 billion 20-year Treasury auction and President Donald Trump's tax bill causing concerns over the U.S. budget deficit.
The Moody's decision was unsurprising given that S&P Global Ratings and Fitch Ratings already downgraded the U.S. sovereign credit one notch in 2011 and 2023, respectively. However, the "biggest disappointment being voiced by the fixed income market in general — not just municipals — is that fact that the deficit is going to increase, and [politicians] made no effort to curtail it," said Peter Delahunt, managing director at StoneX.
It's also possible that some of the weakness on Thursday stems from AAA scales not cutting yields enough on Wednesday, he noted.
But as long "the market ... gets some things resolved on one end and then move forward and then maybe have some challenges on another, we could deal with [it] so long as there's kind of a balance of some good news and bad news," said Jeff Timlin, a managing partner at Sage Advisory, noting it seems like the worst has passed.
The first half of May was a bit slower, but the market should pick up a bit in terms of issuance, he said.
Many of the deals slated for last month were delayed or moved to the day-to-day calendar due to the volatility in the market and the uncertainty, Timlin noted.
"People do want to get some of [these deals] off their plate before summertime kicks in, so there will be a renewed focus on digesting some of the supply, particularly if it comes at attractive levels," he said.
This, along with decreased likelihood of eliminating the tax exemption, may lead to a dip in issuance over the summer, Genter said.
Volume slows the week of May 26 due to the holiday. Issuance for the week is estimated at $3.217 billion, with $2.718 billion of negotiated deals and $499.6 million of competitive deals on tap.
The New Jersey Turnpike Authority leads the negotiated calendar with $750 million of revenue bonds.
There are no deals over $100 million in the competitive market. The largest deal is the Corning City School District with $56.545 million.
Forward supply may wane a bit now that the anxiety of the tax legislation potentially impacting municipal is "out of the way," Delahunt said.
However, if supply slows, Genter noted, demand will not, which will be supportive to the market.
"And even with record demand on a run rate this year and last year and the market has pretty well digested [the deals] all about a problem," he said, noting the deals that come to market are oversubscribed on both the retail and institutional sides.
Demand may also get a boost from crossover buyers, Genter said.
"When you get spreads that are this narrow, you have a lot of crossover buyers, and those people are going to enter and exit the market on a very active basis," he said. "They can help to improve demand, or it dries up, depending on where spreads are."
Fund flows
Investors added $767.9 billion to municipal bond mutual funds in the week ended Wednesday, following $768.9 million of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $192 million compared to the previous week's inflows of $139.6 million.
Tax-exempt municipal money market funds saw outflows of $756.8 million for the week ending May 20, bringing total assets to $139.4 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 rose to 2.62%.
Taxable money-fund assets saw $2.34 billion pulled, bringing the total to $6.78 trillion.
The average seven-day simple yield was at 3.98%.
The SIFMA Swap Index fell to 2.57% on Wednesday compared to the previous week's 3.34%.
AAA scales
MMD's scale was cut up to six basis points: The one-year was at 2.85% (unch) and 2.86% (unch) in two years. The five-year was at 2.92% (unch), the 10-year at 3.37% (+3) and the 30-year at 4.54% (+4) at 3 p.m.
The ICE AAA yield curve was cut up to six basis points: 2.88% (+1) in 2026 and 2.82% (unch) in 2027. The five-year was at 2.95% (unch), the 10-year was at 3.33% (+1) and the 30-year was at 4.51% (+5) at 3 p.m.
The S&P Global Market Intelligence municipal curve saw cuts in the belly and out long: The one-year was at 2.85% (unch) in 2025 and 2.86% (unch) in 2026. The five-year was at 2.92% (unch), the 10-year was at 3.36% (+3) and the 30-year yield was at 4.54% (+4) at 3 p.m.
Bloomberg BVAL was cut up to three basis points: 2.84% (unch) in 2025 and 2.90% (unch) in 2026. The five-year at 3.00% (unch), the 10-year at 3.35% (+1) and the 30-year at 4.51% (+3) at 3 p.m.
Treasury yields fell.
The two-year UST was yielding 3.995% (-3), the three-year was at 3.973% (-4), the five-year at 4.107% (-5), the 10-year at 4.548% (-5), the 20-year at 5.067% (-6) and the 30-year at 5.061% (-3) at 3 p.m.
