News of peace talks with Iran fueled a muni rally last week. But diverging reports over where things stand in the Middle East had little impact on muni yields.
Early Monday, reports circulated that Iran was suspending talks with the U.S. over Israel's actions in Lebanon, leading to losses across financial markets.
However, by midafternoon, President Donald Trump wrote on social media that negotiations were continuing at a "rapid pace," sending stocks to all-time highs and USTs to pare some losses, though USTs still ended the day slightly weaker.
Munis didn't show a reaction to either report, largely ignoring the daily's volatility, as yields were only changed up to one basis point, depending on the scale.
NewSquare Capital's Kim Olsan said the positive movements in munis and Treasuries last week were premature.
"I just felt like there were too many unknown details about a Middle East agreement that the market should move as much as it did," Olsan said. "For munis, we didn't chase it as much — of course, we hadn't sold off as much either."
Considering the "huge calendar this week," Olsan said, "if we can hold steady, that's probably a good result."
Pre-marketing scales for Tuesday's deals show that spreads are steady, so far.
"It's early," Olsan said, but "I'm not getting the sense that dealers are anxious to put aggressively yet."
While geopolitical headlines can whipsaw market movements, the war with Iran may be benefiting the muni market, as developments overseas are affecting it to a lesser degree than USTs and equities, said Chris Lanouette, a portfolio manager at CIBC.
Historically, muni default levels are much lower than corporate defaults for matched ratings, so "with what's going on geopolitically, and you look at the yield you can get on a tax-equivalent basis in municipal bonds. That's probably also supporting flows," he said.
Since the start of the war, oil prices have driven rate movements, Lanouette noted.
"They've been highly correlated, at least until recently, where they've been a little bit of a breakdown, where oil has dropped and yields have not dropped in lockstep, and that's probably due to the [Federal Reserve] in general being a little more hawkish," Lanouette said.
As long as USTs hold in, then it will be a good half of the year for munis, he said.
In the rest of the week, the muni market will have to digest significant supply, Olsan said. There are more than two dozen deals on the calendar worth more than $100 million — that's high even for the start of a heavy redemption month, she said.
The large deals are scattered across several categories, Olsan said, which tends to help the market handle large volume.
"There's definitely cash around. It's going to need to find a home, for the most part," Olsan said.
