Municipals were firmer, underperforming a U.S. Treasury rally after a weaker-than-expected jobs report increased the odds of a rate cut at the Federal Reserve's next meeting. Equities sold off.
Municipal yields fell four to seven basis points, depending on the curve, while UST yields rallied nine to 30 basis points, with the largest gains on the front end.
The two-year muni-UST ratio Friday was at 63%, the five-year at 65%, the 10-year at 77% and the 30-year at 96%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 58%, the five-year at 63%, the 10-year at 73% and the 30-year at 94% at a 4 p.m. read.
The strength in the market Friday stems from the expectation of when the next Fed rate will be, said Alice Cheng, director of municipal credit and investor strategy at Janney.
"Job growth missed badly in July, and the market reacted fast — [bond] yields dropped and Fed rate cut bets surged," said Larry Tentarelli, chief technical strategist for Blue Chip Daily Trend Report. Federal Reserve Chair Jerome "Powell's next move just got a lot more complicated."
The soft headline number was followed by even weaker details, said Bill Adams, chief economist for Comerica Bank. "Job growth was slow, and big downward revisions to May and June made the trend look considerably worse than in last month's report."
And while this pressures the Fed to cut rates, "a September cut is still not a slam dunk," he said. "If shrinking labor supply holds the unemployment rate steady in the next jobs report as inflation rises, the Fed will likely hold rates unchanged in September."
When the Federal Open Market Committee meeting concluded Wednesday, the market widely expected a rate cut in October rather than September, Cheng said.
However, after the nonfarm payrolls were released Friday morning, the market now prices in a 90% chance of a rate cut in September, up from a 40% probability earlier in the week, she said.
Two to three Fed cuts have been priced in for the remainder of the year and three more next year, said Tim McGregor, managing partner at Riverbend Capital Advisors.
"That's why the rally: because this is the best time to lock in to the higher rates before the cut happens," she noted.
Munis have mostly been ignoring a lot of the Treasury rally for quite some time, and they played a little catch-up Friday, McGregor said.
The asset class has been reluctant to rally because of the supply picture, he noted.
Issuance for the week of Aug. 4 remains elevated at an estimated at $15.118 billion, with $12.202 billion of negotiated deals and $2.916 billion of competitive deals on tap, according to LSEG.
New York City (Aa2/AA/AA/AA+/) leads the negotiated calendar with $1.785 billion of GOs.
The competitive calendar is led by Massachusetts with $750 million of GO consolidated loan of 2025 bonds in two series.
Elsewhere, "munis had a difficult July," said Barclays strategists.
The investment-grade municipal bond index lost 0.28%, while high-yield performance was saw larger losses of 1.05%.
"Chaotic tariff policy uncertainty, and the potential effects on inflation, drove rates in the US Treasury market higher as 5- to 30-year maturities were anywhere from 11 to 16 bps higher, depending on tenor," said J. Robert Lind, principal and founder of Lind Capital Partners.
The AAA muni curve steepened in July as 5-year rates fell by 19 basis points, while 10- and 30-year rates rose by six and 17 basis points, respectively, he said.
High-grade muni investors remain cautious amid broader rate volatility and are "targeting short (inside 5 year) duration to 'wait out the storm,'" Lind said.
Like the rest of the year thus far, the month saw issuance that exceeded expectations, totaling $53.4 billion, up nearly 29% year-over-year.
The heavy supply, coupled with rising rates and treasury volatility, "proved too much to handle," Lind said.
Fund flows were positive, according to Lind. Both IG and HY fund complexes saw inflows in three of four weeks, with the former totaling $2.3 billion for the month and the latter only marginally positive at $300 million.
Looking ahead, Barclays said, "the market is in much better shape going into August" with long-end valuations "juicy enough" to attract investors, including crossover buyers.
Inflows are also getting stronger, they said, and bondholders are set to get about $40 billion in redemptions, plus $12 billion in coupon payments.
Even if the rally doesn't begin in August, Barclays said the tax-exempt market should do well in the second half of the year overall.
"To us, a lot will depend on Treasury rates and market technicals," they said. "We believe that investors should continue adding exposure, but do it in a measured way. However, if valuations become even more attractive due to heavy supply and illiquidity, then a more aggressive stance would be warranted."
AAA scales
MMD's scale was bumped seven basis points: The one-year was at 2.32% (-7bp, no Aug roll) and 2.32% (-7bp, no Aug roll) in two years. The five-year was at 2.46% (-7bp, no Aug roll), the 10-year at 3.25% (-7bp, no Aug roll) and the 30-year at 4.60% (-7) at 3 p.m.
The ICE AAA yield curve was bumped four to six basis points: 2.34% (-6) in 2026 and 2.29% (-6) in 2027. The five-year was at 2.48% (-6), the 10-year was at 3.19% (-6) and the 30-year was at 4.58% (-4) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped six to seven basis points: The one-year was at 2.32% (-7) in 2025 and 2.33% (-7) in 2026. The five-year was at 2.46% (-7), the 10-year was at 3.25% (-6) and the 30-year yield was at 4.60% (-7) at 4 p.m.
Bloomberg BVAL was bumped six basis points: 2.30% (-6) in 2025 and 2.31% (-6) in 2026. The five-year at 2.44% (-6), the 10-year at 3.18% (-6) and the 30-year at 4.57% (-6) at 4 p.m.
Treasuries rallied.
The two-year UST was yielding 3.67% (-30), the three-year was at 3.644% (-26), the five-year at 3.749% (-22), the 10-year at 4.209% (-17), the 20-year at 4.782% (-12) and the 30-year at 4.809% (-9) near the close.
Employment report
The weakness in the employment report — with jobs added less than expected and downward revisions to previous months — has increased the odds of a September rate cut, economists said.
"Investors might cheer softer data if it means rate relief is on the horizon," said Gina Bolvin, president of Bolvin Wealth Management Group, "but the road ahead will be bumpy as the market weighs slowing growth against Fed action."
The report "highlights the risk of a harder landing for the labor market," said BMO Chief U.S. Economist Scott Anderson. "It also provides important perspective on Governor [Chris] Waller and [Michelle] Bowman's dissents at the July FOMC meeting this week on their growing concern the FOMC may be falling behind the curve to support the labor market."
Calling the data "unambiguously soft," Art Hogan, B. Riley Wealth chief market strategist, said it's "a reflection of the trade and tariff impact on economic growth."
The report "drops us below the critical 80K-100K replacement level, flashing warning signs as the labor market cools — the U.S. slowdown is starting to take shape," said Alexandra Wilson-Elizondo, global co-CIO of multi-asset solutions at Goldman Sachs Asset Management.
"Importantly, the underlying deterioration is grabbing our attention: cyclical employment has flatlined while falling participation rates are somewhat masking unemployment weakness," she said. "While overall levels are not flashing red, the trend is cause for concern."
Additionally, the weak data "directly challenges the Fed's hawkish posture from this week's FOMC meeting."
"The risk of stagflation has risen meaningfully," said Olu Sonola, head of U.S. economic research at Fitch Ratings. "Inflation is drifting further from target, private-sector economic growth has slowed materially and the labor market has just sounded a warning bell. The Fed's task has become significantly more complex."
The weakness "adds to an emerging dilemma for the Fed looking ahead to the next policy meeting," said Wells Fargo Investment Institute Global Market Strategist Gary Schlossberg. "Slowing consumer-spending growth accompanying higher inflation in [Thursday's] report on June personal income and consumer spending became more apparent in signs of a more noticeable slowdown in job growth."
While the Fed debates "between concern over slowing growth and rising inflation," he said, "political realities could dictate an increasing skew toward sustaining jobs and economic growth if business activity loses momentum too rapidly."
"The internal battle at the Fed will be must-watch TV over the next six weeks as those fixated with the unemployment report will want to hold rates steady while those focused on payroll growth will clamor for rate cuts," according to Jack McIntyre, portfolio manager at Brandywine Global.
"Investors will need to recalibrate their views on what is the 'normal' pace of employment growth going forward given the headwinds of lower immigration, an aging demographic and the arrival of DOGE-related layoffs," said Jeff Schulze, head of economic and market strategy at ClearBridge Investments. "This payroll report kicks the door wide open for a September rate cut."
The poor job creation numbers combined with tariff headwinds could result in a loss of jobs in the next employment report, he said. That "may conjure up fears of a recession. This print should pressure risk assets and cause safe haven buying in U.S. Treasuries."
In addition to the headline miss and downward revisions, "what's more concerning is that with negative impact of tariffs only just starting to be felt, the coming months are likely to see even clearer evidence of a labor market slowdown," said Seema Shah, chief global strategist at Principal Asset Management.
"Of course, with Powell emphasizing his focus on the unemployment rate, which has only ticked up to 4.2%, perhaps it is too early to press the panic button," she said, noting the odds of a September rate cut grew.
Primary to come
New York City (Aa2/AA/AA/AA+/) is set to price Wednesday $1.785 billion of GOs, consisting of $1.548 billion of tax-exempts and $237.32 million of taxables. BofA Securities.
The Florida Development Finance Corp. is set to price $985 million of non-rated revenue bonds (Brightline Florida Passenger Rail Expansion Project), Series 2025B. Morgan Stanley.
The Massachusetts Development Finance Agency (A3/A//) is set to price Tuesday $886.03 million of Beth Israel Lahey health issue bonds. Goldman Sachs.
Colorado Springs (///) is set to price Wednesday $750 million of new-issue and refunding utilities system improvement revenue bonds. Goldman Sachs.
The Port of Seattle (Aa3/AA-/AA-/) is set to price Wednesday $738.275 million of intermediate lien revenue bonds. Morgan Stanley.
The Triborough Bridge and Tunnel Authority (Aa3/AA-/AA-/AA) is set to price Tuesday $721.38 million of general revenue bonds. Morgan Stanley.
The Lower Colorado River Authority (A1/A/A+//) is set to price Wednesday $526.105 million of transmission contract refunding and improvement revenue bonds (LCRA Transmission Services Corporation Project), Series 2025A. Wells Fargo.
The Hays Consolidated Independent School District, Texas, (Aaa//AAA/) is set to price Monday $480 million of PSF-insured unlimited tax school building bonds. FHN Financial.
The Illinois Municipal Electric Agency (A1/AA/AA-/) is set to price Wednesday $476.945 million of Assured Guaranty-insured power supply system revenue refunding bonds, Series 2025A. BofA Securities.
The South Miami Health Facilities Authority, Florida, (/AA-//) is set to price Tuesday $468.625 million of revenue bonds (Baptist Health South Florida Obligated Group). BofA Securities.
Sacramento County is set to price Tuesday $412.765 million of airport system senior revenue bonds. BofA Securities.
Jacksonville, Florida (/AA/AA+/AA) is set to price Tuesday $354.51 million of special revenue bonds. Ramirez.
The Terrell Independent School District, Texas, (Aaa/AAA//) is set to price Monday $263.11 million of PSF-insured unlimited tax school building bonds. Piper Sandler.
The Crowley Independent School District, Texas, (Aaa//AAA/) is set to price Monday $247.77 million of PSF-insured unlimited tax school building bonds. RBC Capital Markets.
Atlanta (A2//A/) is set to price Tuesday $240.14 million of taxable and non-AMT airport customer facility charge revenue bonds. RBC Capital Markets.
The Frisco Independent School District, Texas, (Aaa/AAA//) is set to price Wednesday $208.97 million of PSF-insured unlimited tax refunding bonds, Series 2025A. RBC Capital Markets.
The New Jersey Housing and Mortgage Finance Agency is set to price Thursday $200 of non-AMT social multi-family revenue bonds. Barclays.
The Tigard-Tualatin School District No. 23J, Oregon, (/AA+//) is set to price Tuesday $200 million of Oregon School Bond Guaranty Act-insured GOs. Piper Sandler.
The Austin Community College District, Texas, (Aa1/AA+//) is set to price Tuesday $190 million of limited tax and refunding bonds. Jefferies.
Beth Israel Lahey Health (A3/A//) is set to price Tuesday $180 million of taxable bonds, Series O. Goldman Sachs.
The Delaware State Housing Authority (Aa1///) is set to price Tuesday $150 million of taxable and non-AMT senior single-family mortgage revenue bonds. J.P. Morgan.
The Nebraska Investment Finance Authority (/AAA//) is set to price Wednesday $137.285 million of single-family housing revenue bonds. J.P. Morgan.
The Medina Valley Independent School District, Texas, (/AAA//) is set to price Wednesday $132 million of PSF-insured unlimited tax school building bonds. Raymond James.
The Wisconsin Public Finance Authority is set to price Wednesday $129.205 million of non-rated Texas Infrastructure Program tax-exempt revenue anticipation capital appreciation bonds (Heritage Bend Project). Piper Sandler.
The Dormitory Authority of the State of New York (/A-/A+/) is set to price Thursday $124.61 million of fixed-rate revenue bonds (Roswell Park Cancer Institute Obligated Group), Series 2025A. Morgan Stanley.
The Argyle Independent School District, Texas, (Aaa///) is set to price Tuesday $120.275 million of PSF-insured unlimited tax school building bonds, Series 2025A. BOK Financial.
Texas (/AAA/AAA/) is set to price Friday $104.685 million of GOs. J.P. Morgan.
The Florida Municipal Power Agency (A2//AA-/) is set to price Tuesday $104.67 million of all-requirements power supply project revenue bonds, Series 2025A. J.P. Morgan.
The Oklahoma Housing Finance Agency (Aaa///) is set to price Monday $100 million of single-family mortgage revenue bonds (Homeownership Loan Program), Series 2025C. Raymond James.
Competitive:
Massachusetts (Aa1/AA+/AA+/) is set to sell $450 million of GO consolidated loan of 2025 bonds, Series 2025F, at 10:30 a.m. Eastern Tuesday, and $300 million of GO consolidated loan of 2025 bonds, Series E, at 10 a.m. Tuesday.
The Louisville and Jefferson County Metropolitan Sewer District, Kentucky, (Aa3/AA//) is set to sell $289.08 million of sewer and drainage system revenue and refunding revenue bonds, Series 2025A, at 10 a.m. Tuesday.
The San Diego City Public Facilities Financing Authority, California, (Aa2//AA/) is set to sell $237.305 million of senior water revenue bonds, Series 2025A, at 11 a.m. Wednesday.
The Denver Board of Water Commissioners, Colorado, (Aaa/AAA//) is set to sell $194.16 million of water revenue refunding bonds, Series 2025A, at 10:30 a.m. Tuesday.
Beth Israel Lahey Health, Massachusetts, is set to sell $180 million of taxable bonds, Series 2025 O, on Monday.
Fort Worth, Texas, (Aa3//AA/) is set to sell $107.19 million of general purpose bonds at 10:30 a.m. on Tuesday.
Wisconsin (/AAA/AAA/) is set to sell $100 million of green Environmental Improvement Fund revenue bonds, Series 2025A, at 10:45 a.m. Tuesday.
Cranston, Rhode Island, is set to sell $100 million of 2025 GO anticipation notes, Series 1, at 11:30 a.m. Wednesday.
Gary Siegel and Frank Gargano contributed to this report
