Municipals were little changed Thursday as inflows into muni mutual funds continued. U.S. Treasury yields fell out long and equities ended up.
The two-year muni-UST ratio Thursday was at 60%, the five-year at 64%, the 10-year at 77% and the 30-year at 95%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 61%, the five-year at 65%, the 10-year at 75% and the 30-year at 93% at a 4 p.m. read.
With the break in issuance this week, the market has firmed a bit, said Tim McGregor, managing partner at Riverbend Capital Advisors.
Relative valuations are "dramatically different" right now, as the shorter to intermediate part of the curve does not have a lot of value, whereas the intermediate to longer part of the curve is the opposite, he said.
"The excitement is in the 12- to 20-year part of the curve, and with this many deals and things in the marketplace, you can really customize coupons and calls that you usually don't get a chance to do. So it's a great opportunity," McGregor said.
Supply falls this week ahead of the Labor Day holiday, but issuance is still estimated at $6.639 billion, a move that suggests an upward shift in the average weekly supply figure.
In previous years, supply would fall to $2 billion to $4 billion during holiday-shortened or Federal Open Market Committee meeting weeks.
Now, it's normal to see supply at $6 billion to $8 billion, which McGregor said is not a problem, as the market is used to handling $13 billion to $15 billion of weekly issuance.
Issuance for August is set to be at or above $50 billion, and Kim Olsan, senior fixed income portfolio manager at NewSquare Capital, said the lack of mega deals this month may have contributed to the stable yield curve.
No single series topped $1 billion in par value, though New York City and the New York City Transitional Finance Authority came to market with billion-dollar-plus deals across various series, as did Illinois, she said, while several other issues were sold above $500 million.
"The limited scope of the mega-deal may have helped spread issuance around more categories, lending support to generic benchmark yields," she said.
For the remainder of the third quarter the market is expected to see strong demand even from institutional investors, McGregor said.
While banks and insurance companies continue to shed their muni holdings, he expects a potential reversal in that trend during the fourth quarter.
Elsewhere, September will begin with "short-term bonds trading rich and anything past 15 years up for grabs at attractive levels," Olsan said.
Trades such as NR/AA Orlando, Florida, utility 5s due 2027 at 2.33% (4.00% TEY) showing strength is a function of demand, she said.
Data shows that August's flows have shifted slightly from the previous three months, Olsan said.
"The 0-3 year range has captured 11% of all secondary trades (fixed coupon, tax-exempt), 2% below the prior 90 days. The 3-12 year part of the curve holds a steady 32% share and trades 12 years and longer have 57% of the total this month (up 2%)," she said.
"A steep curve past 10 years may have begun to encourage additional commitments, given the variety of coupon, credit and optionality," Olsan said.
One such trade was a sale of "$8 million-plus (nearly the entire maturity) Beaufort County, [South Carolina], school 3s due 2040 (call 2035), "bought in a competitive sale in early May at 4.05% (+32/MMD) but going into a buyer at 4.55% and spread +65/MMD," she said.
Fund flows
Investors added $590.8 million to municipal bond mutual funds in the week ended Wednesday, following $2.337 billion of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $126.3 million compared to inflows of $1.969 billion the previous week.
Tax-exempt municipal money market funds saw inflows of $147.8 million for the week ending Aug. 26, bringing total assets to $137.012 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds rose to 2.43%.
Taxable money-fund assets saw $47.683 billion added, bringing the total to $7.037 trillion.
The average seven-day simple yield was at 3.97%.
The SIFMA Swap Index was at 2.73% on Wednesday compared to the previous week's 2.78%.
AAA scales
MMD's scale was unchanged: The one-year was at 2.17% and 2.19% in two years. The five-year was at 2.37%, the 10-year at 3.23% and the 30-year at 4.61% at 3 p.m.
The ICE AAA yield curve was bumped up to a basis point: 2.25% (unch) in 2026 and 2.21% (unch) in 2027. The five-year was at 2.40% (unch), the 10-year was at 3.16% (unch) and the 30-year was at 4.59% (-1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.18% in 2025 and 2.20% in 2026. The five-year was at 2.36%, the 10-year was at 3.23% and the 30-year yield was at 4.60% at 4 p.m.
Bloomberg BVAL was bumped one to two basis points: 2.17% (-1) in 2025 and 2.19% (-1) in 2026. The five-year at 2.35% (-1), the 10-year at 3.18% (-1) and the 30-year at 4.58% (-1) at 4 p.m.
Treasuries firmed out long.
The two-year UST was yielding 3.638% (+3), the three-year was at 3.598% (+2), the five-year at 3.7% (flat), the 10-year at 4.212% (-2), the 20-year at 4.837% (-4) and the 30-year at 4.881% (-4) near the close.
