Munis rallied midmorning Friday, following US Treasury yields lower as a weak jobs report increased odds of a Federal Reserve rate cut at its upcoming meeting.
Before Friday, munis followed USTs in a more "constructive tone" this week, said BofA strategists, as yields moved down, especially out long.
As of noon, MMD yields were bumped up to three basis points inside of five years, while 12 years and out saw bumps of five to seven basis points.
The ICE AAA yield curve was bumped six to eight basis points across the curve, while Bloomberg BVAL was bumped two to three basis points.
The rally stemmed from the weak nonfarm payrolls report and revisions that brought the three-month average down to 29,000 jobs per month, further solidifying the chance of a rate cut in September, said Chris Brigati, managing director and CIO at SWBC.
"The print clearly shows the labor market is cooling, but this isn't a meltdown," said Lara Castleton, U.S. head of portfolio construction and strategy at Janus Henderson Investors. "Despite the weak headline, the labor market is still generating jobs, and 4.3% unemployment remains historically healthy."
Following the release, bonds strengthened, she said, "as this softer print cements a Fed rate cut in September, with the door open for more easing through year-end."
And while the "weaker-than-expected payroll print may have cemented the September rate cut the market has been waiting for, but that could also raise the question of what is coming down the road as tariffs, federal cuts, and inflation continue to work their way into the U.S. economy," said Mohammed Murad, head of municipal credit research at PTAM.
"From a municipal perspective, credit — broadly speaking — remains healthy and the expectation of lower rates could potentially alleviate debt payment pressure in certain lower-rated credits and for those who are in the midst or about to embark on a large capital spending cycle," he said.
The Fed rate cut expectations would only impact the front end of the code, said Peter Delahunt of StoneX.
"It impacts the fed funds rate, and then there's a spread between fed funds rate and the five-year, and then there's a spread between the five-year and the 10-year," Delahunt said.
These economic indicators can be read in several ways, including the belief that the economy is heading toward a recession, he said.
In that case, that would lead the stock market to trade off and rates to rally, both of which are happening, Delahunt said.
If next week's inflation figures start to show inflation is "creeping up," then "we go into the dreaded stagflation scenario, and we start to steepen again on the Treasury curve," he said.
Today is "a bond grab, but there's a lot of active buying to try and lock in some of these higher yields before they dip much lower," Brigati said.
The 10-year pushed through significant support levels Thursday and Friday, helping drive a sense of interest in the bond market, he said.
Munis are finally "getting a meaningful lift in today's broad rate rally," said strategist James Pruskowksi, noting the jobs report confirms "what the market has been anticipating: the economy is slowing, and the Fed is at its peak."
"That's a short-term reprieve, but don't expect munis to sprint higher," he said. "Persistent supply and the added financing benefits of lower rates will keep rallies muted, while sell-offs still hit hard."
The muni market has "defied the caution of, 'We're going to have too much supply and not enough demand," said Delahunt.
There has been plenty of demand, mostly from separately managed accounts within 15 years, but the long end has cleared all the supply, he said.
Deals this week got bumped and were oversubscribed prior to Friday's market rally due to the perception that there will be more Fed rate cuts on the horizon, Delahunt said.
"Sentiment is turning, but lasting momentum requires patience," Pruskowski said. "This is a slow-motion muni rally, where positioning matters more than chasing the move."
