Muni yields fell for the sixth straight trading session, as U.S. Treasuries richened out long and equities ended up after a pair of dual economic indicators guaranteed a Federal Reserve cut next week.
Muni yields were bumped up to six basis points, depending on the scale, pushing the two-year muni yield down to 2%.
The two-year muni-UST ratio Thursday was at 57%, the five-year at 61%, the 10-year at 72% and the 30-year at 91%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 56%, the five-year at 59%, the 10-year at 71% and the 30-year at 91% at a 4 p.m. read.
Rates are rallying "like crazy" across the board largely spurred by Friday's jobs report and inflation numbers feel like they're more under control than previously expected, said Nick Venditti, head of municipal fixed income at Allspring.
"It's great on an absolute basis for fixed income. We've seen Treasuries [and munis] rally pretty aggressively," he said.
Thursday saw the release of the consumer price index and jobless claims.
A miss to the upside on CPI, said John Kerschner, global head of securitized products and portfolio manager at Janus Henderson Investors, would normally "cause a bond market sell-off, but due to the initial jobless claims' worse-than-expected number, the bond market is currently focusing on the initial jobless claims number and rallying slightly."
Over the last five years, financial markets have rallied or sold off too aggressively, Venditti said.
"So if this is too much of a rally, if we are 'over our skis' to some degree, the supply snowball that's about to run us all over is going to be a good reason for that," he said.
Munis still have to contend with a lot of supply coming, with the market inundated with supply over the next eight weeks, Venditti said.
Organic flows, though, throughout the year have helped offset the supply part of the equation. There have also been inorganic flows, with "people buying munis a little more aggressively this year; although that's kind of been choppy, depending on what period you look at," he said.
There have been periods this year where deals have gotten "hung up," where pricing has had to cheapen in order to get deals sold, Venditti said.
"So it hasn't been as smooth sailing as it was last year, for example, when there was a lot of money flowing into munis and there was a lot of supply. It's been much choppier, kind of, from a supply/demand perspective. This year, it hasn't been overly negative, but it hasn't been without hurdles either," he said.
These next eight weeks will put that to the test, one way or the other, Venditti said.
For the remainder of the year, a lot will depend on what happens at a macro level, he noted.
The Federal Reserve meets next week, where a 25-basis-point rate cut is expected, Venditti said.
"It feels like that cut is already priced into the market and maybe more than that one … at this point, given how aggressive the rally has been." The macro piece has been the big driver for most of this year, and "to some degree, we are beholden to those macro dynamics, those kind of indirect things, and less muni-specific things," he said.
In the competitive market Thursday, Salt Lake County, Utah, (/AAA//) sold $114.915 million of sales tax revenue bonds to BofA Securities, with 5s of 2/2026 at 2.12%, 5s of 2030 at 2.17%, 5s of 2035 at 2.90%, 5s of 2040 at 3.60% and 4s of 2045 at 4.30%, callable 8/2035.
The Boston Water and Sewer Commission (Aa1/AAA//) sold $100 million of senior general revenue bonds to J.P. Morgan, with 5s of 11/2026 at 2.00%, 5s of 2030 at 2.01%, 4s of 2035 at 2.90%, 3.75s of 2041 at 3.90%, 4s of 2044 at 4.16%, 4.375s of 2050 at 4.40% and 4s of 2055 at 4.40%, callable 5/2033.
Fund flows
Investors added $2.183 billion to municipal bond mutual funds in the week ended Wednesday, following $623.3 million of inflows the prior week, according to LSEG Lipper data.
This is the second largest inflow figure year-to-date and the second time inflows have topped $2 billion in four weeks. One-quarter of the week's inflows were concentrated in a single high-yield open-end fund, according to J.P. Morgan.
High-yield funds saw inflows of $1.064 billion compared to inflows of $238.1 million the previous week.
When muni mutual funds saw inflows of $2.337 billion for the week ending Aug. 20, the figure was skewed by three-quarters of the money coming from a single high-yield ETF that saw an asset allocation shift from equities into long-term munis.
It's possible another asset allocation into munis is responsible for the massive inflows into muni mutual funds, said Pat Luby, head of municipal strategy at CreditSights.
Another possibility is that money is "going where the value is," he said.
"Tax-exempts are rich, especially at the front end of the yield curve. And there's been a lot of demand. There's not a lot of incremental yield there. An open-end mutual fund is also a great way to get exposure," Luby said.
Tax-exempt municipal money market funds saw inflows of $2.105 billion for the week ending Sept. 9, bringing total assets to $138.266 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 fell to 2.30%.
Taxable money-fund assets saw $43.489 billion added, bringing the total to $7.12 trillion.
The average seven-day simple yield was at 3.97%.
The SIFMA Swap Index was at 2.60% on Wednesday compared to the previous week's 2.63%.
AAA scales
MMD's scale was bumped three basis points two years and out: The one-year was at 2.12% (unch) and 2.00% (-3) in two years. The five-year was at 2.17% (-3), the 10-year at 2.90% (-3) and the 30-year at 4.23% (-3) at 3 p.m.
The ICE AAA yield curve was bumped two to six basis points: 2.06% (-3) in 2026 and 2.00% (-2) in 2027. The five-year was at 2.13% (-4), the 10-year was at 2.87% (-5) and the 30-year was at 4.26% (-5) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped four basis points two years and out: The one-year was at 2.10% (unch) in 2025 and 1.98% (-4) in 2026. The five-year was at 2.15% (-4), the 10-year was at 2.90% (-4) and the 30-year yield was at 4.23% (-4) at 4 p.m.
Bloomberg BVAL was bumped three to six basis points: 2.04% (-3) in 2025 and 2.00% (-6) in 2026. The five-year at 2.12% (-4), the 10-year at 2.86% (-6) and the 30-year at 4.21% (-6) at 4 p.m.
Treasuries saw gains out long.
The two-year UST was yielding 3.536% (-1), the three-year was at 3.495% (flat), the five-year at 3.588% (-1), the 10-year at 4.018% (-3), the 20-year at 4.607% (-4) and the 30-year at 4.652% (-5) near the close.
Indicators
The consumer price index and initial jobless claims both came in higher than expected, which analysts said will solidify a 25-basis-point Federal Reserve cut at its upcoming meeting.
"CPI came in decidedly hot this morning; however, so did initial jobless claims, giving the markets conflicting signals," said Janus Henderson's Kerschner.
Core CPI remains "firmly above 3% again," he said, while the three-month annualized rate "is inching towards 4%, showing the trend is going in the decidedly wrong direction."
Fed Chair Jerome Powell "is vowing to fight the ever obvious slowdown in the labor market with rate cuts, while at the same time ignoring the other half of its dual mandate — stable prices, or more specifically, 2% inflation," Kerschner said.
"We do not believe that the 2% target will be reached for at least several more years barring a recession, which, while always possible with external shocks, is not even close to our baseline forecast," he added.
Seema Shah, chief global strategist at Principal Asset Management, said the employment number "trumped" CPI.
But the inflation number "will not give the Fed a moment of hesitation when they announce a rate cut next week. If anything, the jump in jobless claims will inject a bit more urgency in the Fed's decision-making, with Powell likely signaling a sequence of rate cuts is on the way," Shah said.
Still, she dismissed talk of a larger rate cut: "an emergency-sized rate reduction is not required," since jobless claims, despite the jump, "are still quite low compared to 2021 levels, while the broader economic activity data and earnings reports do not signal an economy that is approaching a recessionary tipping point."
"The totality of the economic data this morning pushes the Federal Open Market Committee into an uncomfortable position of going into next week's policy meeting having to defend both sides of the dual mandate," said BMO Chief U.S. Economist Scott Anderson.
But inflation remains "close enough to consensus forecasts to likely allow the Fed to go ahead with a quarter-point rate cut to at least initially respond to a labor market showing increasing signs of distress," he said.
The CPI report won't derail a rate cut, agreed FHN Financial Chief Economist Chris Low. "The fed fund futures market continues to point to a quarter-point cut with a 9% chance of 50bp," he said. "Ten-year yields are actually a little lower than yesterday's close, apparently relief [that] the numbers were in the neighborhood of not-too-bad. Two-year yields are also a little lower."
While inflation has "accelerated since May and it was still clearly accelerating in August," Low said, if inflation tops out near 3% this year, "it is not at all as bad as projected earlier this year."
The numbers were "in line" with projections, said B. Riley Wealth chief market strategist Art Hogan, solidifying his expectations of a quarter-point cut.
"There is a small chance that the Fed could cut by 50 basis points and there may well be some dissenters leaning in that direction," he said.
Although inflation appears "relatively contained," Jennifer Timmerman, senior investment strategy analyst at Wells Fargo Investment Institute, said, when combined with jobless claims, it "clearly locks in a 25-bp rate cut at next week's Fed meeting."
"While investors may cheer the prospect of rate cuts," Josh Jamner, senior investment strategy analyst at ClearBridge Investments, said, "if the pickup in initial jobless claims is sustained in the coming weeks, [the Fed] may turn more cautious on the economic outlook."
The numbers suggest "evidence of more tariff pass-through," said Fitch Ratings Chief Economist Brian Coulton.
Besides a cut next week, Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management, said, the Fed "could follow this up with further easing in October. Although near-term inflationary pressures remain high, and further strong readings are likely in the coming months as businesses run down inventories and pass on cost rises, the Fed is likely to draw comfort from anchored inflation expectations and the absence of overheating in the labor market, which reduce the risks of second round effects."
But while the Fed's short-term plan is clear, Chris Zaccarelli, chief investment officer at Northlight Asset Management, said, "Over the medium term the fact that core inflation is running quite a bit higher on a month-over-month basis is going to complicate matters and the market knows this."
He suggested watching how the market moves today, "because all things being equal, a rate cut should be very bullish for the market, but the 0.4% month-over-month inflation rate is much too high for a sustained rate cutting cycle and it will now be an issue of how many more times can the Fed cut if inflation does not head toward their 2.0% year-over-year target."
After next week, the "path forward will be complicated," said Comerica Bank Chief Economist Bill Adams. "If Powell repeats his 'proceed carefully' language at the press conference following the decision, financial markets will interpret that as a signal that the Fed will likely hold rates steady at their following decision in October."
Comerica expects the Fed to cut at every other meeting until March.
Gina Bolvin, president of Bolvin Wealth Management Group, was less convinced about a rate cut. "The Fed may still cut, but this data argues for a gradual path, not an aggressive pivot."
Inflation remains too high, she said, and "core inflation at 3.1% suggests we're not out of the woods yet, but we're not heading into the deep end either."
Gary Siegel and Frank Gargano contributed to this report.
