Municipals extended their selloff Thursday, as the asset class saw the largest losses out long, while U.S. Treasury yields were little changed and equities ended up.
The two-year muni-UST ratio Thursday was at 63%, the five-year at 65%, the 10-year at 75% 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 62%, the five-year at 65%, the 10-year at 73% and the 30-year at 93% at a 4 p.m. read.
Munis are "under pressure as elevated primary supply collides with lackluster seasonal reinvestment flows, leaving dealers heavy and buyers selective," said James Pruskowski, an investor and market strategist.
Despite tariff and politically related headline risk, the U.S. economy keeps defying expectations, "sustaining growth and delaying the policy pivot many had hoped would provide rate stability by now," he said.
"This volatility is amplifying risk aversion, particularly in the face of deteriorating fundamentals across key sectors like higher education and not-for-profit healthcare, both of which are contending with structural imbalances and rising operational costs," Pruskowski said. "Add in climate-exacerbated weather disruptions of late and the result is a market recalibrating credit risk at the same time it digests outsized new issuance."
There will not be relief on the supply side as "deferred borrowing and growing policy uncertainty are fueling a 'just get it done' issuance mentality that's likely to persist well into yearend," he said.
At the end of 2024, munis were a good opportunity and they remain a good entry point given absolute yields compared to five-year averages, said Shannon Rinehart, a senior portfolio manager of municipal debt at Columbia Threadneedle Investments.
One softening effect for munis not apparent at the end of 2024 was cheaper ratios, she said.
Ninety-two percent "is a much better starting point for relative performance than the low 80s we were at yearend," Rinehart noted.
The Federal Reserve can have a pretty immediate impact on the front end, which has been providing an attractive investment opportunity yield for investors for much longer than expected, she said.
"The idea that we would see yield maturities inside two years drop is probably something that's long overdue," Rinehart said.
"So then the more pressing matter becomes what do we see at 10 years and 30 years," she said.
Fiscal policy has a much greater impact on fixed income than monetary and "we've already seen much of that baked in," according to Rinehart.
"We are in an environment where real rates are quite positive, term premiums quite positive … While we are likely to see some volatility as we work our way through this, I don't think we will see another 65 basis points on the 30-year point," she said.
There is "heightened uncertainty," but the muni market is high quality, according to Rinehart.
However, over the last few weeks, there has been some softening in credit, impacted in part by the few high-yield deals that haven't gotten done, she said.
"So, despite the improved technical backdrop where we obviously are seeing better reinvestment dollars to put to work, investors are expressing some discipline in terms of what they will and will not finance in the primary market," she said.
In the higher education sector, some bankers have been overly optimistic about the market's appetite, and "deals ended up getting done at levels where we probably would have advised they start at," Rinehart said.
In addition to some deals not getting done, others are being repriced in order to get done, she said.
There has been some credit deterioration recently, so a near-term credit widening catalyst would be one of two things, Rinehart said.
For one, if there is a rate rally, there will be some spread widening on the back of that, because "investors will still be looking for that absolute yield, and that's what will compensate," she said.
And then, secondarily, if there are flows out of munis, there could be some technically driven widening if high-yield funds or the long-end funds no longer become "du jour" for investor flows, she said.
In the primary market Thursday, J.P. Morgan priced for Salt Lake City (A1/A+/NR/AA) $604.515 million airport revenue bonds. The first tranche, $553.875 million of Series 2025A AMT bonds, saw 5s of 7/2026 at 3.06%, 5s of 2030 at 3.28%, 5s of 2035 at 4.15%, 5s of 2040 at 4.80%, 5.25s of 2045 at 5.17%, 5.5s of 2050 at 5.18% and 5.5s of 2055 at 5.25%, callable 7/1/2035.
The second tranche, $50.64 million of Series B non-AMT bonds, with 5s of 7/2029 at 2.63%, 5s of 2030 at 2.73%, 5s of 2035 at 3.54%, 5s of 2040 at 4.32%, 5.25s of 2045 at 4.80%, 5.5s of 2050 at 4.95% and 5.5s of 2055 at 5.02%, callable 7/1/2035.
BofA Securities priced for Charlotte, North Carolina, (Aaa/AAA//) $145.76 million water and sewer system refunding revenue bonds, with 5s of 7/2026 at 2.48%, 5s of 2030 at 2.59%, 5s of 2035 at 3.41% and 5s of 2040 at 4.04%, callable 7/1/2035.
Ziegler priced for the California Statewide Communities Development Authority (/AA-//) $151.98 million Cal-Mortgage Loan insured revenue and refunding bonds (Sequoia Living Project), with 5s of 7/2026 at 2.58%, 5s of 2030 at 2.71%, 5s of 2035 at 3.49%, 5s of 2040 at 4.25%, 5s of 2045 at 4.75%, 5s of 2050 at par, 5s of 2055 at 5.10%, callable 7/1/2035.
In the competitive market, the New York State Thruway Authority (Aa1///AAA/) sold $483.305 million of state PIT revenue bonds, Series 2025A, Bidding Group 1, to J.P. Morgan, with 5s of 3/2027 at 2.48%, 5s of 2030 at 2.67%, 5s of 2035 at 3.50% and 5s of 2038 at 4.00%, callable 9/15/2035.
The authority also sold $443.98 million of state PIT revenue bonds, Series 2025A, Bidding Group 2, to J.P. Morgan, with 5s of 3/2039 at 4.20%, 5s of 2040 at 4.32% and 5s of 2045 at 4.80%, callable 9/15/2035.
Additionally, the authority sold $330.71 million of state PIT revenue bonds, Series 2025A, Bidding Group 3, to BofA Securities, with 5s of 3/2046 at 4.92% and 5s of 2049 at 5.04%, callable 9/15/2035.
The authority sold $395.06 million of state PIT revenue bonds, Series 2025A, Bidding Group 4, to RBC Capital Markets, with 5s of 3/2051 at 5.06% and 5s of 2053 at 5.08%, callable 9/15/2035.
The authority sold $413.7 million of state PIT green climate-certified revenue bonds, Series 2025B Bidding Group 2, to Jefferies, with 5.125s of 2057 at 5.10% and 5s of 2059 at 5.14%, callable 9/15/2035.
Wakefield, Massachusetts, (/AA+//) sold $106.14 million GO purpose loan of 2025 bonds to Jefferies, with 5s of 8/2026 at 2.40%, 5s of 2030 at 2.37%, 5s of 2035 at 3.25%, 5s of 2040 at 4.11%, 5s of 2045 at 4.68% and 5s of 2050 at 4.90%, callable 8/15/2034.
Fund flows
Investors pulled $224.6 million from municipal bond mutual funds in the week ended Wednesday, following $431.9 million of inflows the prior week, according to LSEG Lipper data. This marks the end of 11 consecutive weeks of inflows.
High-yield funds saw inflows of $34.1 million compared to $137.1 million the previous week.
Tax-exempt municipal money market funds saw outflows of $1.843 billion for the week ending July 15, bringing total assets to $137.383 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 fell to 1.66%.
Taxable money-fund assets saw $4.133 billion pulled, bringing the total to $6.886 trillion.
The average seven-day simple yield was at 3.98%.
The SIFMA Swap Index was at 2.46% on Wednesday compared to the previous week's 1.63%.
AAA scales
MMD's scale was cut up to 10 basis points: The one-year was at 2.46% (unch) and 2.46% (unch) in two years. The five-year was at 2.58% (+3), the 10-year at 3.33% (+5) and the 30-year at 4.75% (+10) at 3 p.m.
The ICE AAA yield curve saw small cuts outside five years: 2.46% (-1) in 2026 and 2.42% (-1) in 2027. The five-year was at 2.61% (-4), the 10-year was at 3.28% (+2) and the 30-year was at 4.67% (+3) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut up to 10 basis points: The one-year was at 2.46% (unch) in 2025 and 2.47% (unch) in 2026. The five-year was at 2.58% (+3), the 10-year was at 3.34% (+6) and the 30-year yield was at 4.74% (+10) at 4 p.m.
Bloomberg BVAL saw cuts out long: 2.46% (-1) in 2025 and 2.48% (-1) in 2026. The five-year at 2.59% (-1), the 10-year at 3.32% (+6) and the 30-year at 4.73% (+9) at 4 p.m.
Treasuries were little changed.
The two-year UST was yielding 3.918% (+2), the three-year was at 3.887% (+2), the five-year at 4% (+1), the 10-year at 4.456% (flat), the 20-year at 5.009% (flat) and the 30-year at 5.009% (flat) just before the close.
