Munis were weaker Monday, outperforming a U.S. Treasury selloff amid escalating geopolitical tensions in the Middle East. Equities ended mixed.
The two-year muni-UST ratio Monday was at 58%, the five-year at 59%, the 10-year at 64% and the 30-year at 90%, according to Municipal Market Data's 3 p.m. EDT read. The two-year muni-UST ratio was at 61%, the five-year at 61%, the 10-year at 65% and the 30-year at 90%, according to ICE Data Services.
"After an immediate global rush to safe haven assets like U.S. Treasury bonds, interest rates have backed up today and given back those weekend gains as the market digests the likely push on inflation (due to the higher energy prices) versus the likely reduction in economic activity resulting from a prolonged Middle East war," said Scott Colbert, chief economist and director of fixed income management at Commerce Trust.
"When there's danger and uncertainty, most people would suspect it to be a flight-to-quality, but the uncertainty has become a little more certain in terms of how it's going to impact oil," said Peter Delahunt, managing director and head of the municipal bond department at StoneX.
Oil prices have spiked above $70 a barrel, which is viewed as having a major impact on inflation. Treasury rates, which have a directional relationship to inflation, have "backed up," he said.
The muni market started the day off quiet, only cheaper by a few basis points, but "some folks [still kept] their eyes on the news coming out of Iran and their eyes on the Treasury market, and then they're going have their eyes on the new-issue market, but there's nothing in substance that was priced in the new issue market [Monday]," Delahunt said.
First thing Monday, there wasn't much action as market participants waited to see what would happen, but as the day went on, munis got progressively weaker, said Kyle Gerberding, director of trading, a portfolio manager and partner at Asset Preservation Advisors.
"With each additional secondary bid list that hit the screen, it looked like the bid side just kind of backed up another basis point or two. And as it became more clear that Treasuries were going to stay a point and a half weaker on the day, and oil was going to stay elevated by 5% to 8%, depending on where we closed, munis certainly adjusted along with it," he said.
In secondary trading Monday, there was a bit of a "skew" bid side, said Matt Smith, founder and CEO of Spline Data.
"It definitely seemed like a net selling type of day from customers' perspective, which is pretty typical … but once the market does steady, which the rates market kind of has, then the buyside kind of gets back into their buyside behavior of buying bonds," he said.
Overall, March was poised to be a difficult month due to some seasonal headwinds, but the question marks about Iran — and its potential impact on higher inflation due to pressure on oil prices and potential slower growth — will be the big thing for the foreseeable future, said Cooper Howard, director of fixed income research and strategy at Charles Schwab
"The market's trying to grapple with how long this escalation is going to continue, and the longer it goes, the more impact it could have on growth and inflation," he said.
The inflation narrative may "stick" more than the safety trade and the flight-to-quality, said a sellside source.
"Everybody was so on edge about inflation before this happened, that now it's kind of like, 'Now here's a real reason why inflation could happen, because oil could go through the roof.' And if they sink a couple more ships, ships in the Strait of Hormuz, then it'll definitely go through the roof,'" they said.
"Broadly, there's still support in [munis]. I don't think that people will think that munis are an asset class to sell in this scenario," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital. "If you think about prior conflicts over the last couple of decades, the market has weathered the conditions fairly well."
"From the market's perspective, the quicker a Middle East resolution, the better for risk-based assets," Commerce Trust's Colbert said. "In the longer run, to the extent the war continues and puts pressure on energy prices, our expectations would be that the temporary push up in inflation would be more than offset by slower economic activity and an ongoing flight to quality, which in general would push interest rates down."
AAA scales
MMD's scale saw cuts: 2.02% (unch, no March roll) in 2027 and 2.03% (unch, no March roll) in 2028. The five-year was 2.15% (+5, no March roll), the 10-year was 2.58% (+5, +1bp March roll) and the 30-year was 4.21% (+4) at 3 p.m.
The ICE AAA yield curve was cut three to seven basis points: 2.07% (+3) in 2027 and 2.08% (+5) in 2028. The five-year was at 2.16% (+7), the 10-year was at 2.56% (+6) and the 30-year was at 4.18% (+4) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut four basis points three years and out: The one-year was at 2.03% (unch) in 2027 and 2.04% (unch) in 2028. The five-year was at 2.15% (+4), the 10-year was at 2.55% (+4) and the 30-year yield was at 4.20% (+4) at 3 p.m.
Bloomberg BVAL was cut three to five basis points: 2.04% (+3) in 2027 and 2.05% (+4) in 2028. The five-year at 2.12% (+5), the 10-year at 2.52% (+5) and the 30-year at 4.09% (+5) at 4 p.m.
U.S. Treasuries sold off.
The two-year UST was yielding 3.474% (+10), the three-year was at 3.481% (+10), the five-year at 3.611% (+11), the 10-year at 4.035% (+9), the 20-year at 4.627% (+8) and the 30-year at 4.683% (+7) near 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.
Arizona Transportation Board (Aa1/AA+//) is set to price Tuesday $786.25 million of highway revenue and revenue refunding bonds. Wells Fargo.
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 Missouri Health and Educational Facilities Authority (Aa2/AA//) is set to price Tuesday $517.56 million of health facilities revenue bonds (BJC Health System), Series 2026A. BofA Securities.
The Lower Colorado River Authority (A1/A/A+/) is set to price Tuesday $478.55 million of transmission contract refunding and improvement revenue bonds (LCRA Transmission Services Corporation Project). BofA Securities.
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 Manatee County School Board, Florida, (/A+/AA-/) is set to price Tuesday $226.74 million of certificates of participation, consisting of $207.27 million of Series 2026 A bonds and $19.47 million of Series 2026B refunding bonds. BofA Securities.
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 Rhode Island Housing and Mortgage Finance Corp. (Aa1/AA+//) is set to price Tuesday $125 million of social homeownership opportunity bonds, consisting of $120.165 million of Series 88-A non-AMT bonds and $4.835 million of Series 88-B AMT bonds. BofA Securities.
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.
The Illinois Finance Authority (/A+//) is set to price Tuesday $100.795 million of revenue bonds (Springfield Sustainable Energy Partners). Piper Sandler.
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.
The Grand Strand Water and Sewer Authority, South Carolina, (Aa1/AA+//) is set to sell $100 million of waterworks and sewer system improvement revenue bonds at 11 a.m. Tuesday.
— Christina Baker and Gary Siegel contributed to this report.
