Munis rallied through midday Wednesday, as financial markets reacted favorably to the two-week ceasefire with Iran.
Wednesday's market rally is tied to President Donald Trump's announcement of the temporary ceasefire, which came about Tuesday night, an hour and a half before the president's 8 p.m. deadline, market participants said.
"The equity markets, the rates markets [are] really strong today, and we expect AAA scales to be bumped," an analyst said.
MMD's scale was bumped five to 10 basis points. MMD's 10-year is at 2.95%-2.97% and the 30-year is at 4.31%-4.33% at a 12:20 p.m. reading.
The ICE AAA yield curve was bumped eight to 10 basis points, and Bloomberg BVAL was bumped eight to 10 basis points at 12:45 p.m.
The market strength will "show up" in fund flows, with allocations across the board — equity funds and bond funds, said Peter Block, managing director of credit strategy at Ramirez.
J.P. Morgan concurred: "Today's Treasury market reaction to the developments is encouraging for muni flows over the near term," J.P. Morgan strategists led by Peter DeGroot said.
While markets opened stronger Wednesday, by around 11:30 a.m., rates were coming back, said Matt Smith, founder and CEO of Spline Data.
"Oil is retracing a little bit. The Nasdaq isn't quite as strong as it was to open the morning. And you can even see corporate bond NAVs off a little bit. So I wouldn't be surprised if we give a little bit of a little bit of this up toward the end of the day, or in any fashion tomorrow," he said.
Wednesday's rally follows slight firmness in the muni market Tuesday, a surprise to some, as they did not expect a resolution or good news as Trump's deadline approached.
"People intuitively knew that Trump was going to look for an exit strategy for his own problem, but they weren't willing to have conviction yet. People had been positioning for it for a while," Block said.
At the close Tuesday, muni yields were bumped up to two basis points, depending on the scale, while UST yields fell 10 years and in. Equities ended mixed.
However, around 5 p.m., USTs came back into green territory and equities returned as rumors swirled Pakistan was brokering a deal, an analyst said.
The ceasefire, announced at the 11th hour Tuesday, appears to be "holding" as of today, said Ajay Thomas, head of public finance at FHN Financial.
"Oil prices have immediately rallied, declining just over 17% from last Friday's closing level," he added. "While the price of a barrel of oil remains very elevated compared to the pre-conflict price, any decline is favorable. Cargo traffic is moving now through the Strait of Hormuz, another positive sign that the ceasefire may hold."
Other technicals in the marketplace are currently favorable for the bond market, Thomas said, noting that the "outlier" remains the ongoing pressure on inflation due to higher energy costs.
"We may see this continue so long as oil prices stay high, but over time we are seeing signs that when the Mideast conflict comes to its conclusion, the pricing for energy will also settle back down which is providing market participants comfort that inflation will stay within reason and get back on track to towards the Fed's target rate of 2.00%," Thomas said.
Because of all the uncertainty the market has faced over the last month, a "sense of predictability has been a welcome change," he said.
