Bond markets sold off Tuesday as ongoing inflation fears and continued uncertainty around the war with Iran pushed muni and U.S. Treasury yields higher.
Muni yields rose up to eight basis points, while UST yields rose five to eight basis points.
The 30-year UST yield jumped to its highest level since 2007 on Tuesday morning, just shy of 5.20%, as "an unresolved Middle East conflict threatens to further push up costs and fiscal expenditures across global economies," said
"It's not that these are newer fears that have surfaced. It seems that the market at any given time can only handle one sort of crisis. There is the nervousness that [the Strait of] Hormuz is not resolving in a linear fashion anytime soon," said Sweta Singh, founding partner and portfolio manager at City Different Investments.
Tuesday's selloff is a "Treasury-oil story," said Charles Schwab director of fixed income strategy Cooper Howard.
The market's "big concern is that the situation in Iran is going to ... continue to linger," Howard said, "and that's going to result in higher oil prices and, ultimately, higher inflation longer-term."
"The flight to safety bid right now is for U.S. equities not U.S. rate products, including munis, since the inflation-adjusted returns are low and inflation worries continue to loom on the horizon," said Vikram Rai, portfolio manager and macro trader at First New York.
Therefore, he said, "munis are likely to witness some weakness over the next few weeks unless there is a geopolitical catalyst."
There's also uncertainty around new Federal Reserve Chair Kevin Warsh, who is coming into a divided Fed where his ability to cut rates on the front end is debatable, Singh said.
The muni market sees an $11.8 billion new-issue calendar, and market participants are trying to put money to work, Singh said.
"We're putting a heavy calendar to work this week. Historically, summer is a strong season for munis, and people are trying to put money to work both on the sellside and buyside before we go for that long holiday weekend," she said.
The selloff Tuesday did little to disrupt the new-issue calendar, where nearly $5 billion of tax-exempt issuance was set to price, according to J.P. Morgan strategists.
But while deals were priced, "in terms of the actual end buyers, they're being a little bit more quiet, and they're being cautious … on their clients' behalf, rather than stepping in front of something that might be a little bit more bold and impactful than what we've seen recently," said Tim Iltz, fixed-income credit and market analyst at HJ Sims.
While it's difficult to anticipate how this will play out in the short term, Howard said, in the longer term, yields will remain elevated.
First, the Fed appears increasingly likely to hold or even hike rates, Howard said. Second, the market's expectation for inflation is increasing, and there's no reason to assume that it will decline. Third, Howard expects the term premium to remain elevated.
"Longer-term, I think all three of those components put a floor on how low yields can go," he said.
New-issue market
In the primary market Monday, Jefferies priced for the Massachusetts Water Resources Authority (Aa1/AA+/AA+/) $586.185 million of green general revenue bonds. The first tranche, $236.42 million of Series 2026C bonds, saw 5s of 8/2027 at 2.66%, 5s of 2031 at 2.94%, 5s of 2036 at 3.31%, 5s of 2041 at 3.70%, 5s of 2046 at 4.22%, 5s of 2051 at 4.55% and 5s of 2056 at 4.64%, callable 8/2036.
The second tranche, $349.77 million of refunding Series 2026D bonds, saw 5s of 8/2027 at 2.66%, 5s of 2031 at 2.94%, 5s of 2036 at 3.31% and 5s of 2040 at 3.65%, callable 8/2036.
Barclays priced for the Massachusetts Development Finance Agency (A1///) $432.295 million of Northeastern University revenue bonds, Series 2026A, with 5s of 10/2036 at 3.48%, 5s of 2041 at 3.90%, 5s of 2046 at 4.37% and 5s of 2050 at 4.67%, callable 10/2036.
In the competitive market, the Missouri Highways and Transportation Commission (Aa1/AA+/AAA/) sold to BofA Securities $608.52 million of third lien state road bonds, Series 2026A, with 5s of 5/2027 at 2.64%, 5s of 2031 at 2.98% and 5s of 2033 at 3.13%, noncall.
