Munis sold off Tuesday as U.S. Treasury yields rose and equities ended down as news over rising oil prices and the current status of peace talks put pressure on financial markets.
The two-year muni-UST ratio Tuesday was at 61%, the five-year at 66%, the 10-year at 72% 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 64%, the five-year at 68%, the 10-year at 72% and the 30-year at 92%, according to ICE Data Services.
The market selloff on Tuesday is mostly a result of the Middle East conflict and the "real-time headlines, whether or not the U.S. and Iran are having talks about ending the conflict," said Ajay Thomas, head of public finance at FHN Financial.
"You would think global instability leads to flight for quality, but you also have the inflationary pressures that come with higher oil prices. I would say the inflationary pressures have been winning, and that's why you're seeing Treasury and muni rates move higher," said Keith Richard, head of public finance at Siebert Williams Shank.
Issuance is elevated this week, at a sizable $13 billion, with around $6.6 billion issued Tuesday, according to J.P. Morgan.
Some of the deals that came to market Tuesday, before the first MMD read at 10:25 a.m., and were able to "get in and out" may have done a little better. However, following the second MMD read at 12:30 p.m. with larger cuts, the deals may have been "happy to adjust on the fly and be in line to hold their book together," Richard said.
"The amount of new-issue supply needed to find a market-clearing price is also putting pressure on tax-exempt yields," Thomas said.
"Investors' available cash position is declining and even with muni-Treasury ratios getting higher, available cash for purchases has slowed and investors appear much more cautious — with all the market uncertainty — to step into transactions," he said.
Overall, March is a tough month for munis, with lower reinvestment, supply/demand imbalance and tax time, said Ron Banaszek, co-head of public finance and lead underwriter at Blaylock Van.
And then the conflict in the Middle East gets "layered on top of it," and it's a recipe for larger moves, he said.
The weakness in fixed-income markets on Tuesday comes after stocks and bonds saw strength on Monday following President Donald Trump's announcement of a five-day pause on strikes on Iranian power plants amid talks between the two countries.
"The market was in a position where any bit of good news was going to get a positive reaction," Banaszek said.
"You saw the market exuberance right away, where you saw the bond market rally, the stock market rally, and then by the end of the day, the rally was really short-lived," said Sweta Singh, founding partner and portfolio manager at City Different Investments.
The reaction Monday may have been more optimistic than it should have been until "we have hard evidence of a resolution," said Elaine Brennan, executive director of the public finance department at Roosevelt & Cross, as fixed-income markets saw losses Tuesday.
Late Monday, the Iranian media disputed Trump's claim of peace talks as "fake news."
Furthermore, Israel and Iran traded strikes Tuesday, leading markets to consider whether a pause is still on the table, Banaszek said.
"So what happened between Monday and Tuesday is that stagflation is grabbing some kind of validity," Singh said. "Monday morning, we woke up to, 'Hey, maybe the geopolitical tension is over,' but to know it might be prolonged or it could go into spring and early summer, that equals sustained higher prices, which translates into inflation."
When the war with Iran began, the first reaction — which is the usual reaction — was flight to quality. However, the focus turned to oil because of where the conflict is happening and what it would do to oil prices, Banaszek said.
"And [the price of] oil started going up, so people, like the market, started focusing on that, and they took that one step further to think about inflation, which leads to continuing the logic down the path" of what happens with the Federal Reserve, he said.
The Fed's next move seems up in the air, with fluctuations on whether the Fed will hold, cut, or hike rates by year's end, said Kevin McGuigan, director at Municipal Market Analytics.
"That depends heavily on how the war in Iran goes," he said of the Fed's future moves. "If the war were to end tomorrow, which it won't, that could cause a rally in rates and imply that the Fed's far more likely to cut than to hike. But as this drags on, expectations of a hike are going to continue to increase as inflation concerns [rise]."
A month ago, most believed the Fed would move rates lower twice; now it's in "wait-and-see" mode until the Fed gets more information and new numbers, said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.
"As you push those rate cuts back, that's just going to push … average short-term [UST] rates just much higher over the near term," said Brian Therien, a senior fixed income analyst on the investment strategy team at Edward Jones.
The market has seen volatility since the start of the year, and this conflict adds even more volatility and uncertainty, Kozlik said, though he notes the higher yields present an opportunity.
From a longer-term perspective, it's probably a good entry point, Banaszek said, as ratios are wider and overall nominal rates are higher.
Deals may start getting priced wider than expected to offset the tone and entice buyers to come in on specific deals, he said.
With the market adjustments in munis, there are some buying opportunities, especially with the large deal list this week, Brennan said.
New York City comes to market this week with $2.65 billion of general obligation bonds. Given the recent uncertainty around the NYC credit, there's an opportunity for investors to get some yield and relative value with that issue, as with other issues in the market, she said.
New-issue market
In the primary market Tuesday, Morgan Stanley priced for the California Health Facilities Financing Authority (/AA/AA/) $644.34 million of Rady Children's Health revenue bonds. The first tranche, $44.42 million of fixed-mode Series 2026A bonds, saw 5s of 8/2031 at 2.57% and 5s of 2036 at 3.13%, noncall.
The second tranche, $153.755 million of long-term mode Series 2026B-1, saw 5s of 8/2047 with a tender date of 5/1/2031 at 2.96%, callable 5/1/2030.
The third tranche, $161.325 million of long-term mode Series 2026B-2, saw 5s of 8/2065 with a tender date of 5/1/2034 at 3.25%, callable 5/1/2033.
The fourth tranche, $284.84 million of long-term mode Series 2026B-3 bonds, saw 5s of 8/2065 with a tender date of 8/15/2036 at 3.48%, callable 8/15/2035.
BofA Securities priced for the Metropolitan Government of Nashville and Davidson County, Tennessee, (Aa2/AA+//AA+/) $556.93 million of GO refunding bonds, Series 2026D, with 5s of 1/2027 at 2.41%, 5s of 2031 at 2.77%, 5s of 2036 at 3.27% and 5s of 2037 at 3.39%, callable 1/1/2036.
In the competitive market, the Elk Grove Unified School District, California, (Aa2///) sold $136 million GOs to Morgan Stanley, with 5.5s of 8/2027 at 2.14%, 5.5s of 2028 at 2.17%, 5.25s of 2052 at 4.41% and 4.5s of 2055 at 4.625%, callable 8/1/2035.
AAA scales
MMD's scale was cut seven to 12 basis points: 2.38% (+12) in 2027 and 2.41% (+12) in 2028. The five-year was 2.65% (+12), the 10-year was 3.14% (+12) and the 30-year was 4.52% (+7) at 3 p.m.
The ICE AAA yield curve was cut five to 13 basis points: 2.40% (+5) in 2027 and 2.48% (+10) in 2028. The five-year was at 2.70% (+13), the 10-year was at 3.16% (+13) and the 30-year was at 4.53% (+6) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut eight to 10 basis points: The one-year was at 2.34% (+9) in 2027 and 2.37% (+9) in 2028. The five-year was at 2.60% (+10), the 10-year was at 3.09% (+10) and the 30-year yield was at 4.51% (+8) at 3 p.m.
Bloomberg BVAL was cut seven to 11 basis points: 2.37% (+10) in 2027 and 2.40% (+10) in 2028. The five-year at 2.58% (+11), the 10-year at 3.07% (+11) and the 30-year at 4.46% (+7) at 4 p.m.
U.S. Treasuries were weaker.
The two-year UST was yielding 3.923% (+7), the three-year was at 3.928% (+6), the five-year at 4.026% (+6), the 10-year at 4.391% (+5), the 20-year at 4.975% (+4) and the 30-year at 4.949% (+3) at the close.
