Munis rallied out of the gate Wednesday morning on news of a temporary two-week ceasefire in the Iran war. However, as the day progressed and the ceasefire grew more tenuous, the asset class slightly pared its early-morning gains, though it still ended significantly firmer at the close.
Wednesday's rally was directly 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.
Financial markets, including the muni market, priced in too much of a "sure thing, done deal" this morning, said Kyle Gerberding, director of trading, a portfolio manager and partner at Asset Preservation Advisors.
"Everybody grabbed as much as they could first thing this morning, and then since about 8:15, 8:30 this morning, it has slowed down," he said.
There was a bevy of activity around 8 a.m., and some prints could have justified muni yields lowered by 15 basis points. Since then, the market has settled a little bit, Gerberding said.
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.
Throughout the day, the market has been trying to understand what was agreed upon, Gerberding said.
There have been conflicting reports over the closure of the Strait of Hormuz, and despite the ceasefire, attacks have been reported, with the United Arab Emirates, Kuwait and Bahrain coming under facing drone and missile attacks from Iran and Israeli strikes in Lebanon.
"Our concern is that it's an immediate knee-jerk reaction to what is, of course, great news, but is it sustainable?" Gerberding asked.
Currently, the ceasefire is holding but "very precarious," said Ajay Thomas, head of public finance at FHN Financial, noting that time will tell if it can hold.
"Iran is limiting the cargo traffic through the Strait to about a dozen ships per day, and that is if those ships will pay the assessed tolls," he said.
"The Trump administration is not pleased and is likely to ratchet up pressure publicly for more free-flowing access," Thomas said.
The two-year muni-UST ratio Wednesday was at 60%, the five-year at 65%, the 10-year at 69% and the 30-year at 88%, according to Municipal Market Data's 3 p.m. EDT read. The two-year muni-UST ratio was at 60%, the five-year at 63%, the 10-year at 68% and the 30-year at 88%, according to ICE Data Services.
Overall, Wednesday was a "risk-on" rally, said Peter Block, managing director of credit strategy at Ramirez.
There was a lot of trading activity. New issues did well, and deals were oversubscribed. Some issuers even accelerated deals, trying to push them through today and take advantage where they can.
Furthermore, the market strength will "show up" in fund flows, with allocations across the board — equity funds and bond funds, Block said.
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.
New-issue market
In the primary market Wednesday, Wells Fargo priced for the California Municipal Finance Authority (A2///) $738.15 million of revenue bonds (SFMTA Potrero Yard Modernization Project). The first tranche, $488.15 million of Series 2026A tax-exempt bonds, saw 5s of 9/2031 at 2.92%, 5s of 3/2026 at 3.30%, 5s of 9/2036 at 3.36%, 5s of 9/2041 at 3.81%, 5s of 9/2046 at 4.27%, 5.25s of 9/2051 at 4.53%, 5.5s of 9/2056 at 4.60%, 5.5s of 9/2060 at 4.67% and 5s of 2060 at 4.83%, callable 3/1/2036.
The second tranche, $250 million of Series 2026B tax-exempt milestone bonds, saw 5s of 6/2032 at 3.08%, callable 6/30/2030.
BofA Securities priced for Rochester, Minnesota, (Aa2/AA//) $550 million of health care facilities revenue bonds (Mayo Clinic), Series 2026A, with 5s of 11/2033 at 2.93%, 5s of 2036 at 3.24%, 5s of 2042 at 3.73% and 5s of 2046 at 4.10%, callable 5/15/2036.
In the competitive market, California (Aa2/AA-/AA/) sold $440.385 million of taxable various purpose GO bonds to Wells Fargo, with 4.5s of 4/2028 at 3.87% and 4.05s of 2031 at par, noncall.
The state also sold $300 million of taxable various purpose GO bonds to Barclays, with 5s of 4/2036 at 4.69%, noncall.
AAA scales
MMD's scale was bumped seven to 10 basis points: 2.27% (-7) in 2027 and 2.29% (-7) in 2028. The five-year was 2.53% (-8), the 10-year was 2.95% (-10) and the 30-year was 4.31% (-9) at 3 p.m.
The ICE AAA yield curve was bumped eight to 10 basis points: 2.29% (-9) in 2027 and 2.31% (-9) in 2028. The five-year was at 2.49% (-10), the 10-year was at 2.94% (-9) and the 30-year was at 4.32% (-8) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped eight basis points: The one-year was at 2.24% (-8) in 2027 and 2.27% (-8) in 2028. The five-year was at 2.51% (-8), the 10-year was at 2.95% (-8) and the 30-year yield was at 4.33% (-8) at 3 p.m.
Bloomberg BVAL was bumped six to 10 basis points: 2.28% (-6) in 2027 and 2.28% (-7) in 2028. The five-year at 2.43% (-8), the 10-year at 2.90% (-9) and the 30-year at 4.31% (-6) at 4 p.m.
U.S. Treasuries were essentially flat.
The two-year UST was yielding 3.78% (-1), the three-year was at 3.804% (-1), the five-year at 3.911% (-2), the 10-year at 4.282% (-1), the 20-year at 4.866% (-1) and the 30-year at 4.879% (+1) at the close.
