Munis are selling off Thursday morning as the weakness over the past several days culminated in the largest cuts in months amid continuing tensions in the Middle East and rising oil prices.
Refinitiv MMD's scale was cut eight to 10 basis points at its 12:15 p.m. read, pushing the 10-year to 3.32%-3.34% and the 30-year to 4.49%-4.51%.
The ICE AAA yield curve was cut eight to 12 basis points at 12:45 p.m., while Bloomberg BVAL saw yields rise six to eight basis points.
Oil prices topped $100 a barrel Thursday morning as the U.S.-Iran conflict continues with no resolution in sight. Tensions in the Middle East are sky high, and President Trump told Axios he was considering "restarting major combat operations in Iran — including strikes that would be bigger than the ones carried out during Operation Epic Fury."
Though undecided, Trump plans to hold Iran responsible for any subsequent Houthi attacks in the Red Sea.
Last week, the market seemed "desensitized" to the geopolitical turmoil in the Middle East, but continued negative headlines, a stall in peace talks and the inability to get them restarted have pressured front-end UST yields and munis across the curve, said Kevin McGuigan, director at Municipal Market Analytics.
"Everyone's following oil. So Treasuries are also higher today. So we're seeing munis following suit," said Jason Wong, vice president of municipals at AmeriVet Securities.
Market weakness has been building over the past week, starting off small. "You start to see some new offers not turnover, and then some deals struggle, cuts from preliminary pricings. It all points to the buyside stepping away a bit," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
"It feels like the market is experiencing a bit of déjà vu," said Mohammed Murad, head of municipal credit research at PTAM. "Investors are once again weighing renewed Middle East tensions, tariffs, and higher oil prices, while also absorbing a heavy municipal supply calendar this week, with another two weeks of elevated issuance expected."
In some combination, "these factors may be contributing to the wider muni and Treasury yields," he said.
However, the key "isn't just this week's headlines — it's whether the war-oil-inflation narrative proves more persistent this time, particularly with the emergence of the Bab al-Mandeb Strait as another potential chokepoint for global oil shipments," he said.
Given all the uncertainty over the conditions in Iran, along with the inflation narrative, "we're seeing a lot of activity around the shorter end of the yield curve, and we're seeing some fairly heavy bid lists in terms of accounts that are trying to shake up their duration profile," said Tim Iltz, fixed income credit and market analyst at HJ Sims.
Demand has been tested by several larger offerings amid the broader market selloff, with a few deals, including the District of Columbia, the New York City Transition Finance Authority and Boston University, seeing cuts, Municipal Market Analytics said in a report.
"The shift toward cuts across several prominent transactions suggests investors have become less willing to absorb new issuance at aggressive levels," the report said.
While market technicals remain "supportive," recent UST weakness and heightened inflation concerns seem to have "increased investors' required concessions, particularly for larger benchmark offerings," MMA said.
Things have gotten a little rich in the front and the belly, but less so in the long end, said Mikhail Foux, managing director and head of municipal research and strategy at Barclays.
So there would be an adjustment of some sort at some point, but he thought it would happen a bit later.
August is typically the time when things get cheaper, but last year it was July, so "it's not really surprising that like the last week of July [this] started to happen," Foux said.
He isn't overly worried, and a lot of course will depend on what rates will do.
Muni mutual funds are expected to have large inflows in August, which will help support the market, according to Foux.
However, the second half of August will become a bit more liquid and a bit more cautious, he said.
Historically, the late third quarter and early fourth quarter have never been a great time for the muni market, with some exceptions, Foux said.
