Municipal bonds and Treasuries rallied Friday as a weaker-than-expected jobs report solidified a September rate cut at the Federal Reserve's next meeting. Equities ended down.
The two-year muni-UST ratio Friday was at 60%, the five-year at 64%, the 10-year at 76% and the 30-year at 93%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 59%, the five-year at 63%, the 10-year at 73% and the 30-year at 92% at a 4 p.m. read.
Muni yields were bumped two to 12 basis points, depending on the scale, with the largest gains out long, and UST yields fell six to nine basis points, pushing the two-year UST to its lowest levels in over two years.
The muni market rallied hard on Friday in anticipation of the Fed cuts that are expected at the September meeting.
"Bonds are rallying both in Treasuries and munis as investors assume that the Fed will now have enough certainty ... to be persuaded to move forward with rate cuts, the first one being enacted when the Fed announces its interest rate decision on Sept. 17," said Ajay Thomas, head of public finance at FHN Financial.
"The question now is by how much and is it likely that the Fed will implement more cuts this year," he said. "With only [two] meetings left this year after September's meeting — October and December — the market is leaning into the idea that baseline interest rates will be lower as we progress into the rest of this year."
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.
However, Friday's rally is one day; it's a single reaction, said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
More key data will be released between now and the Fed's mid-September meeting, as there are inflation figures Sept. 10 and 11 and retail sales a few days before the meeting, she noted.
Those reports could either confirm what the jobs report showed — the trend of a slowing economy and inflation — or they could refute it, as the cost figures in the economy are separating a bit, Olsan said.
These economic indicators can be read in several ways, including the belief that the economy is heading toward a recession, said Peter Delahunt of StoneX.
In that case, that would lead rates to rally, which is happening, Delahunt said.
If upcoming data 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.
The market is primed for any sign of economic weakness as market participants sought evidence that the Fed will cut in September, said Dora Lee, director of research and partner at Belle Haven.
"It would be one thing if this were the first weak economic numbers, but this has been a trend … through the past several weeks. And so [the market's reaction] doesn't seem like it's an anomaly, and the rally today isn't solely based on today's numbers," she said.
It's a combination of several weeks of weak economic data, whereas before there was a lot of ambiguity of "how much of it was the tariffs coming on and off and a lot of economic uncertainty," Lee 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," said Chris Brigati, managing director and CIO at SWBC.
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."
New-issue calendar
Issuance for the week of Sept. 8 is at an estimated $10.355 billion, with $8.545 billion of negotiated deals and $1.81 billion of competitive deals on tap, according to LSEG.
Leading the negotiated calendar is $2.01 billion of Dallas-Fort Worth International Airport joint revenue refunding and improvement bonds.
The competitive calendar is led by Clark County School District, Nevada, with $579.99 million of limited tax GO building and refunding bonds.
AAA scales
MMD's scale was bumped two to 12 basis points: The one-year was at 2.19% (-2) and 2.11% (-7) in two years. The five-year was at 2.28% (-7), the 10-year at 3.09% (-7) and the 30-year at 4.43% (-12) at 3 p.m.
The ICE AAA yield curve was bumped six to 10 basis points: 2.18% (-6) in 2026 and 2.12% (-6) in 2027. The five-year was at 2.29% (-7), the 10-year was at 3.05% (-8) and the 30-year was at 4.46% (-9) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped three to 12 basis points: The one-year was at 2.16% (-3) in 2025 and 2.10% (-7) in 2026. The five-year was at 2.27% (-7), the 10-year was at 3.06% (-11) and the 30-year yield was at 4.43% (-12) at 4 p.m.
Bloomberg BVAL was bumped two to 11 basis points: 2.13% (-2) in 2025 and 2.13% (-4) in 2026. The five-year at 2.25% (-7), the 10-year at 3.05% (-8) and the 30-year at 4.43% (-11) at 4 p.m.
Treasuries saw gains.
The two-year UST was yielding 3.516% (-7), the three-year was at 3.482% (-7), the five-year at 3.589% (-6), the 10-year at 4.089% (-7), the 20-year at 4.715% (-9) and the 30-year at 4.773% (-8) near the close.
Employment report
Friday's employment report weakness solidified economists' expectations for a 25-basis-point September rate cut and lifted projections for further easing.
The report "just about strikes a balance between reinforcing market expectations for a sequence of Fed rate cuts and not yet inviting renewed concerns around recession, so the broad market response should be mildly positive," said Seema Shah, chief global strategist at Principal Asset Management.
Still, worries about economic growth "are starting to creep in," and more labor market weakness "would soon tip the balance to 'bad news is simply bad news," she said.
If upcoming reports show inflation rose, it "could strike new fears about a stagflationary mix," Shah said. "The market is treading a very, very narrow path to continued gains."
"The Fed is always late to move, but usually not too late to avert disaster," said FHN Financial Chief Economist Chris Low. "We'll see if that works for them now, because the FOMC clearly should have cut rates in June."
While looking to assert their independence in the face of President Donald Trump's calls for lower rates, he said, "the Fed has painted itself into a defensive position."
He wonders whether Cleveland Fed President Beth Hammack and Kansas City Fed President Jeff Schmid "still see no reason to cut rates, as both insisted in just the last couple of days."
While the fed funds futures are pricing in a 100% chance of a quarter-point cut, Low said, the chances for a bigger cut "would be higher if the FOMC was not so stubbornly indifferent to economic and job growth."
The labor market is likely to be viewed even weaker after the annual payroll revision on September 9, Low warned.
Kevin O'Neil, associate portfolio manager and senior research analyst for Brandywine Global, said, "Despite lingering uncertainty around inflation, the weakness in the labor market is too significant for the Fed to ignore."
"The labor data is probably not weak enough for the Fed to cut by 50 basis points given inflation persistence," said Jeffrey Roach, chief economist for LPL Financial, "so as of now, our expectations are for a 25-basis-point cut."
However, "some investors are questioning whether the Fed could cut by 50bp in September," said James Knightley, chief international economist at ING.
The latest "Beige Book made for grim reading," he said, "and that was the catalyst for a 50bp move last year to kick things off in terms of Fed rate cuts. However, the conservative make-up of the Fed and uncertainty over tariffs on inflation means there probably won't be a majority, but we could see two or three voting for 50bp."
A half-point easing is in play, according to Jamie Cox, managing partner for Harris Financial Group.
"The Federal Reserve's free pass on the labor market has ended," as the August report confirmed a cooler labor market," he said. "Slower job gains, combined with an uptick in the unemployment rate and moderating wage growth, support the view that the rate of positive change in the labor market has slowed significantly. These employment data give the Fed all the reasons it needs to shift its balance of risks and lower rates."
The report doesn't change the outlook for an ease, said Jeff Schulze, head of economic and market strategy at ClearBridge Investments. The data support "additional and faster rate cuts beyond September."
Primary to come:
The cities of Dallas and Fort Worth, Texas, (A1/AA-//AA/) are set to price Wednesday $1.717 billion of Dallas-Fort Worth International Airport joint revenue refunding and improvement bonds, consisting of $1.417 billion of Series 2025A-1 and $300 million of Series 2025A-2. BofA Securities.
Atlanta (Aa3/AA//AA+/) is set to price Tuesday $1.03 billion of Hartsfield-Jackson Atlanta International Airport general revenue bonds, consisting of $51.89 million of non-AMT Series 2025A bonds, $926.705 million of green Series 2025B-1 bonds and $51.175 million of Series 2025B-2 bonds. J.P. Morgan.
Austin, Texas (/AAA/AAA/) is set to price Tuesday a $774.515 million deal, consisting of $349.255 million of public improvement and refunding bonds, $273.025 million of certificates of obligation, $37.63 million of public property finance contractual obligations, $84.715 million of taxable public improvement bonds and $29.89 million of taxable certificates of obligation. Wells Fargo.
The Chicago Board of Education (/BB+//BBB/) is set to price Wednesday $650 million of unlimited tax GOs. Loop Capital Markets.
The Sullivan County Resort Facilities Local Development Corp. is set to price Thursday $561 million of nonrated tax-exempt revenue bonds. KeyBanc Capital Markets.
The Savannah-Georgia Convention Center Authority is set to price Tuesday $386.65 million of convention center hotel revenue bonds, consisting of $87.425 million of Series A bonds (/BBB-//), $209.435 million of non-rated Series B and $89.79 million of Series C bonds (/BBB-//). Morgan Stanley.
The Adventist Health System/West (/BBB+/BBB+/) is set to price Thursday $372.62 million of taxable corporate CUSIPs. RBC Capital Markets.
The California Health Facilities Financing Authority (/BBB+/BBB+/) is set to price Thursday $308.425 million of Adventist Health System/West fixed-mode revenue bonds, Series 2025A. RBC Capital Markets.
The cities of Dallas and Fort Worth, Texas, (A1/AA-//AA/) are set to price Wednesday $292.84 million of non-AMT Dallas Fort Worth International Airport joint revenue refunding and improvement bonds, Series 2025B. Raymond James.
The Mt. San Antonio Community College District, California, (Aa1/AA//) is set to price Tuesday $250 million of Election of 2024 GOs, consisting of $230 million of Series 2025A bonds and $20 million of taxable Series 2025B bonds. Barclays.
The Long Beach Community College District, California, (Aa2/AA//) is set to price Wednesday $235 million of GOs, consisting of $200 million of Election of 2016 GOs, Series 2025E, and $35 million of Election of 2024 GOs, Series 2025 A-1. Raymond James.
Honolulu (/AA+/AA/) is set to price Wednesday $223.295 million of first bond resolution green senior wastewater system revenue bonds, Series 2025B. BofA Securities.
The Missouri Housing Development Commission (/AA+//) is set to price Tuesday $187.5 million of non-AMT single-family mortgage revenue bonds (First Place Homeownership Loan Program), Series 2025F. Stifel.
The Florida Housing Finance Corp. (Aaa///) is set to price Wednesday $150 million of non-AMT homeowner mortgage revenue bonds, Series 2025 5. BofA Securities.
The Virginia Housing Development Authority (Aaa/AAA//) is set to price Tuesday $140.96 million of taxable commonwealth mortgage bonds, Series D. Morgan Stanley
The Ohio State Treasurer (Aa1//AA+/) is set to price Tuesday $114.29 million of capital facilities lease-appropriation bonds (Adult Correctional Building Fund Projects), Series 2025A. Piper Sandler.
The Pomona Unified School District, California, (Aa3///) is set to price Tuesday $100 million of Election of 2024 GOs, Series A. Stifel.
Competitive
The Clark County School District, Nevada, (A1/AA-//) is set to sell $579.99 million of limited tax GO building and refunding bonds, Series 2025B, at 11:30 a.m. Eastern Tuesday.
The Douglasville-Douglas County Water and Sewer Authority, Georgia, (Aa2/AA//) is set to sell $206.4 million of water and sewerage revenue bonds at 10:30 a.m. Tuesday.
Salt Lake County, Utah, (/AAA//) is set to sell $115.055 million of sales tax revenue bonds at 11:30 a.m. Thursday.
The Alaska Housing Finance Corp. (Aaa/AAA//) is set to price $110 million of non-AMT collateralized bonds (Veterans Mortgage Program), First Series 2025, at noon Tuesday.
The Boston Water and Sewer Commission is set to sell $100 million of senior general revenue bonds, Series 2025A, at 11 a.m. Thursday.
Gary Siegel and Frank Gargano contributed to this story.
