Munis sold off Tuesday as escalating tensions in the Middle East showed no signs of easing, while U.S. Treasuries saw smaller losses and equities ended down.
The two-year muni-UST ratio Tuesday was at 61%, the five-year at 62%, the 10-year at 66% and the 30-year at 91%, according to Municipal Market Data's 3 p.m. EDT read. The two-year muni-UST ratio was at 62%, the five-year at 62%, the 10-year at 66% and the 30-year at 91%, according to ICE Data Services.
The muni market ended last week with a backdrop of strong technicals, huge inflows and a more manageable calendar on tap for the week ahead, said Jamie Iselin, head of the municipal fixed income team and a senior portfolio manager at Neuberger Berman.
However, the U.S. and Israel launched strikes on Iran on Feb. 28 and Tehran, in turn, launched retaliatory strikes, setting off a global conflict in the Middle East and roiling financial markets.
"Sometimes when there is a war or something, you see a flight to quality, but this is so tied in … with prices and cost of oil and in with inflation," said Elaine Brennan, executive director of the public finance department at Roosevelt and Cross.
Therefore, this led muni yields to follow UST yields higher over the two-day period.
The asset class had a more muted reaction Monday before selling off Tuesday, as munis played a little bit of a catch-up to the backup in rates, said Chris Brigati, managing director and CIO at SWBC.
Treasuries, though, pared losses Tuesday, with yields up only two to three basis points at the close, compared to yields being seven to nine basis points higher around 8 a.m.
However, it may take the muni market longer to recover, Brennan said, as muni yields rose as the day went on.
"Once the damage is done, it takes a little longer for it to come back," Brennan said of the muni market.
The extent of the damage depends on the duration of the conflict.
"If it peters out a little bit and there's some diplomatic solution or de-escalation, we could come right back to where we were last week," Brennan said.
"In the one sense, in the short term, if oil keeps going higher, that could lead to higher headline inflation prints. But if the conflict goes on for a long time, eventually it's going to have a negative impact on growth," Iselin said.
The market volatility has had little impact on deals coming to market. Monday is typically not a "huge" new-issue day, but deals came to market Tuesday and got done, according to Iselin.
"Unless this reverses itself, as the week progresses, you'll probably start to see some price concessions on deals just given the given the backup that we've seen in muni rates," he said.
"It'll be interesting to see how the calendar holds in if the new issue calendar comes in, and underwriters need to price deals to a discount, some new-issue buyers [may] play it close to the vest and try to get some good deals in here this week," said Pat Luby, head of municipal strategy at CreditSights.
In the high-yield market Monday, some generic benchmark names like Buckeyes and COFINAs were only off three to four basis points. However, there were very few high-yield trade prints Monday, said Justin Horowitz, senior portfolio manager at Birch Creek, on Tuesday morning.
On Tuesday, some of the high-yield generic benchmark names in the early morning were off another five to six basis points, in line with MMD's cuts at its 10:20 a.m. reading, he said.
For example, New Jersey tobacco, subordinated bonds traded Monday and again Tuesday, about five basis points cheaper, and COFINA bonds were sold to a customer Tuesday three basis points cheaper than where a dealer bought bonds, according to Horowitz.
"So if you assume a three basis point bid-ask, that would be about six basis points weaker on the day," he said around noon.
Over the last two days, there has been some weakness in the large benchmark names that "likely might be from some of the trading accounts or dealers that kind of use some of these benchmark names as general muni exposure, and then they hedge them with Treasury," Horowitz said.
"When Treasuries are off, and they sell these cheaper, it's not necessarily reflective of the broader market. Sometimes these types of trades will lead the broader market and so you'll see trades in these benchmark names happen first because they're the most liquid, and everybody owns them. They're easy. You have pretty high liquidity on them, and then you'll start to see some of these less common names lag behind," he noted.
Because of geopolitical events that have led to surging oil prices and increased inflationary pressures, the market is starting to reduce bets on rate cuts, said Chris Low, chief economist at FHN Financial.
The likelihood of a Fed rate cut at its March meeting was close to or at zero percent, said Ron Banaszek, co-head of public finance and lead underwriter at Blaylock Van.
"But does this potentially, depending on how long this lasts and where things end up, put any pressure on our inflation numbers and what does that do for the long term of rates?" he asked.
"There is now one full cut priced in this year, plus a 50% chance of a second. Rates are still expected to drop, but later," Low said. "In effect, this is the intersection of the pop in oil due to the war in Iran and the Federal Open Market Committee's new show-me attitude toward inflation. There is zero patience on the FOMC for looking beyond one-off or temporary inflation pressure. Until inflation falls, the Fed will not cut."
New-issue market
In the primary market Tuesday, Wells Fargo priced for the Arizona Transportation Board (Aa1/AA+//) $793.545 million of highway revenue and revenue refunding bonds, with 5s of 7/2027 at 2.17%, 5s of 2030 at 2.30%, 5s of 2031 at 2.37%, 5s of 2036 at 2.92%, 5s of 2041 at 3.43%, and 5s of 2046 at 4.03%, callable 7/1/2036.
BofA Securities priced for the Lower Colorado River Authority (A1/A/A+/) $569.96 million of transmission contract refunding and improvement revenue bonds (LCRA Transmission Services Corp. Project), with 5s of 5/2027 at 2.27%, 5s of 2031 at 2.49%, 5s of 2036 at 3.01%, 5s of 2041 at 3.56%, 5s of 2046 at 4.27%, 5s of 2051 at 4.56% and 5.25s of 2056 at 4.65%, callable 5/15/2035.
Wells Fargo priced for the North Carolina Housing Finance Agency (Aa1/AA+//) $299 million of non-AMT homeownership revenue bonds, with 2.45s of 7/2027 at par, 2.8s of 1/2031 at par, 2.85s of 7/2031 at par, 3.5s of 1/2036 at par, 3.55s of 7/2036 at par, 4.05s of 7/2041 at par, 4.5s of 7/2046 at par, 4.65s of 7/2051 at par, 4.7s of 7/2057 at par and 6.25s of 7/2057 at 3.24%, callable 1/1/2034.
BofA Securities priced for the Manatee County School Board, Florida, (/A+/AA-/) $226.74 million of certificates of participation. The first tranche, $207.27 million of Series 2026 A bonds, saw 5s of 7/2027 at 2.32%, 5s of 2031 at 2.55%, 5s of 2036 at 3.09%, 5s of 2041 at 3.64% and 5s of 2045 at 4.21%, callable 7/1/2036.
The second tranche, $19.47 million of Series 2026B refunding bonds, saw 5s of 7/2027 at 2.32% and 5s of 2029 at 2.42%, noncall.
Morgan Stanley priced for the Essex County Improvement Authority, New Jersey, $172.43 million of county guaranteed lease revenue project notes (Essex County Family Court Building Project), with 4s of 3/2027 at 2.25%, noncall.
In the competitive market, the Grand Strand Water and Sewer Authority, South Carolina, (Aa1/AA+//) sold $100 million of waterworks and sewer system improvement revenue bonds to Baird, with 5s of 6/2029 at 2.10%, 5s of 2031 at 2.19%, 5s of 2036 at 2.66%, 5s of 2041 at 3.19%, 5s of 2046 at 3.96%, 5s of 2051 at 4.22% and 5s of 2056 at 4.38%, callable 6/1/2036.
AAA scales
MMD's scale was cut five to 10 basis points: 2.12% (+10) in 2027 and 2.13% (+10) in 2028. The five-year was 2.25% (+10), the 10-year was 2.68% (+10) and the 30-year was 4.26% (+5) at 3 p.m.
The ICE AAA yield curve was cut eight to 11 basis points: 2.14% (+8) in 2027 and 2.16% (+8) in 2028. The five-year was at 2.26% (+10), the 10-year was at 2.66% (+10) and the 30-year was at 4.25% (+7) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut six to eight basis points three years and out: The one-year was at 2.11% (+8) in 2027 and 2.12% (+8) in 2028. The five-year was at 2.23% (+8), the 10-year was at 2.63% (+8) and the 30-year yield was at 4.26% (+8) at 3 p.m.
Bloomberg BVAL was cut six to 11 basis points: 2.14% (+9) in 2027 and 2.14% (+9) in 2028. The five-year at 2.22% (+10), the 10-year at 2.63% (+11) and the 30-year at 4.18% (+8) at 4 p.m.
U.S. Treasuries were weaker.
The two-year UST was yielding 3.4501% (+3), the three-year was at 3.507% (+3), the five-year at 3.635% (+2), the 10-year at 4.06% (+2), the 20-year at 4.653% (+3) and the 30-year at 4.705% (+2) at the close.
Primary to come
Houston is set to price Thursday on behalf of the Convention and Entertainment Facilities Department $1.425 million of hotel occupancy tax and special revenue bonds, consisting of $200 million of Series 2026A refunding bonds (/AA-//), $75 million of Series 2026B taxable refunding bonds (/AA-//), $1.05 million of Series 2026C first lien refunding bonds (/A-//) and $100 million of Series 2026D second lien bonds (/BBB+//). J.P. Morgan.
The California Community Choice Financing Authority (A3///) is set to price $900 million of green clean energy project revenue bonds. Goldman Sachs.
The Triborough Bridge and Tunnel Authority (/AA+//AA+/) is set to price Wednesday $820 million of payroll mobility tax senior lien refunding bonds, consisting of $775 million of Subseries 2026A-1 and $45 million of Subseries 2026A-2. Jefferies.
The Lamar Consolidated Independent School District (Aaa/AAA//) is set to price Thursday $545 million of PSF-insured unlimited tax schoolhouse bonds. RBC Capital Markets.
The University of Texas System Board of Regents (Aaa/AAA/AAA/) is set to price Wednesday $392.51 million of permanent university fund bonds, Series 2026A. J.P. Morgan.
The Troy School District, Michigan, (/AA//) is set to price Wednesday $203.405 million of school building and site and refunding bonds. Huntington Securities.
The National Finance Authority is set to price Thursday $194.202 million of social affordable housing certificates, consisting of $161.752 million of Series 2026A-1 and $32.45 million of Series 2026A-2. Wells Fargo.
Auburn University (Aa2/AA//) is set to price Wednesday $163.25 million of general fee revenue refunding bonds. Wells Fargo.
The New Hampshire Health and Education Facilities Authority (Aa3/AA//) is set to price Thursday $149.045 million of BAM-insured University System of New Hampshire issue revenue bonds. RBC Capital Markets.
The Nevada Housing Division (/AA+//) is set to price Wednesday $107.28 million of senior single-family mortgage revenue bonds, consisting of $54.295 million of Series 2026A n non-AMT bonds and $52.985 million of Series 2026B taxable bonds. J.P. Morgan.
Competitive
Cambridge, Massachusetts, (Aaa/AAA/AAA/) is set to sell $162.81 million of GO municipal purpose loan bonds, at 11 a.m. Eastern Wednesday.
Las Vegas (Aa2/AA+//) is set to sell $109.84 million of limited tax GO city hall refunding bonds, Series 2026C, at 11:30 a.m. Thursday.
North Hempstead, New York, is set to sell $101.919 million of GO bond anticipation notes, Series 2026A, at 11:15 a.m. Thursday.
