Munis sold off through midday Tuesday, with yields moving higher along with U.S. Treasuries' yields as rising oil prices and the continued war in the Middle East amid conflicting reports of peace talks continued to weigh on markets. Equities are down.
MMD's scale was cut five to 12 basis points. MMD's 10-year is at 3.12%-3.14% and the 30-year is at 4.450%-4.52% at a 12:30 p.m. reading.
The ICE AAA yield curve was cut four to 13 basis points, and Bloomberg BVAL was cut six to 10 basis points at 1:20 p.m.
The weakness in fixed-income markets comes after stocks and bonds saw strength Monday following President Donald Trump's announcement of a five-day pause on strikes on Iranian power plants amid talks between the two countries.
"The market was in a position where any bit of good news was going to get a positive reaction," said Ron Banaszek, co-head of public finance and lead underwriter at Blaylock Van.
"You saw the market exuberance right away, where you saw the bond market rally, the stock market rally, and then by the end of the day, the rally was really short-lived," said Sweta Singh, founding partner at portfolio manager at City Different Investments.
The reaction Monday may have been more optimistic than it should have been until we have hard evidence of a resolution, said Elaine Brennan, executive director of the public finance department at Roosevelt & Cross, as fixed-income markets saw losses Tuesday.
Late Monday, the Iranian media disputed Trump's claim of peace talks as "fake news."
Furthermore, Israel and Iran traded strikes Tuesday, leading markets to consider whether a pause is still on the table, Banaszek said.
"So what happened between Monday and Tuesday is that stagflation is grabbing some kind of validity," Singh said. "Monday morning, we woke up to, 'Hey, maybe the geopolitical tension is over,' but to know it might be prolonged or it could go into spring and early summer, that equals sustained higher prices, which translates into inflation."
When the war with Iran began, the first reaction — which is the usual reaction — is flight to quality. However, as the focus turned to oil because of where the conflict is happening and what it would do to oil prices, Banaszek said.
"And [the price of] oil started going up, so people, like the market, started focusing on that, and they took that one step further to think about inflation, which leads tto continuing the logic down the path of" what happens with the Federal Reserve, which may cause it to be on hold for a longer period of time, he said.
The Fed's next move seems up in the air, with fluctuations on whether the Fed will hold, cut, or hike rates by year's end, said Kevin McGuigan, director at Municipal Market Analytics.
"That depends heavily on how the war in Iran goes," he said of the Fed's future moves. "If the war were to end tomorrow, which it won't, that could cause a rally in rates and imply that the Fed's far more likely to cut than to hike. But as this drags on, expectations of a hike are going to continue to increase as inflation concerns [rise]."
From a longer-term perspective, it's probably a good entry point, Banaszek said, as ratios are wider and overall nominal rates are higher.
Deals may start getting priced wider than expected to offset the tone and entice buyers to come in on specific deals, he said.
With the market adjustments in munis, there are some buying opportunities, especially with the large deal list this week, Brennan said.
New York City comes to market this week with $2.65 billion of general obligation bonds. Given the recent uncertainty with the NYC credit, there's an opportunity for investors to get some yield and relative value with that issue, as with other issues in the market, she said.
