Munis sold off Wednesday, with the largest losses seen in the belly of the curve, as U.S. Treasuries cheapened further and equities ended mixed.
The two-year muni-UST ratio Wednesday was at 59%, the five-year at 61%, the 10-year at 66% 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 61%, the five-year at 62%, the 10-year at 67% and the 30-year at 91%, according to ICE Data Services.
The Investment Company Institute Wednesday reported inflows of $1.452 billion for the week ending March 4, following $2.2 billion of inflows the previous week.
Exchange-traded funds saw inflows of $664 million after $464 million of inflows the week prior, per ICI data.
Munis opened weaker Wednesday. MMD's scale was cut up to four basis points at 10:25 a.m. reading, with the maturities between 2036 and 2041 seeing the largest cuts. The ICE AAA yield curve also saw cuts up to four basis points.
The weakness stemmed from early-morning trades.
"Several wider trade prints in a Wisconsin GO 5% of 2038 (call 2035) were as wide as +23 … The name had tightened after it was issued in late January to around +9-10 area," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital Markets.
As the day progressed, muni yields were cut further. MMD's scale was cut up to six basis points, at a 12:25 p.m. reading, with maturities between 2032 and 2042 seeing cuts of four to six basis points. The ICE AAA yield curve was cut five basis points from 10 to 15 years at 1 p.m.
This happened as more blocks traded at wider levels.
A block of Minnesota GO 5s of 2033 was "put away" at 2.61% with a +17 spread, compared to 2.53% on Monday, Olsan said.
A block of Washington GO 5s of 2038 from a February deal was put away at 3.19% with a +23 spread. The $35 million original maturity was mostly intact. The original yield of 2.91% at a +5 spread, meaning it was a "big correction," Olsan said.
At the close, muni yields were cut up to eight basis points, depending on the scale, with the largest cuts in the belly of the curve.
"There was a certain amount of resilience munis had in the last week, comfortable enough with distribution," Olsan said. "But the 10-year Treasury backing up behind 4.20%, it proved to be the catalyst for adjusted bid sides."
The market is at the high end of the 10-year Treasury rates from the past two months, said Chris Brigati, managing director and CIO at SWBC.
"This is a crucial level to see what happens here. That's weighing on people's minds in muni space," at a time when the April 15 tax deadline approaches, a time when "we really get slow in munis," he said.
Wednesday also saw the release of the consumer price index, but it had little impact on Wednesday's selloff.
The CPI report didn't do much, as it came in as expected, said Chris Brigati, managing director and CIO at SWBC.
"The bond market response [to CPI] is almost non-existent," according to John Kerschner, global head of securitized products and portfolio manager at Janus Henderson Investors.
The market weakness was more around the "oil situation" and geopolitics, Brigati said, as the war in the Middle East rages on.
There is a lot of information regarding the war, and some conflicting, prompting a "wait-and-see attitude" from accounts before establishing the next steps, said Tim Iltz, fixed income credit and market analyst at HJ Sims.
"On the one hand, we're hearing from the White House that things are getting wrapped up, but there's also news to the contrary out there, so [they're] trying to figure out exactly where we're at in the conflict," he said.
The muni market is currently a very "dynamic market. Taking a look at some of the guideposts that we've used in past, like oil prices and Treasury yields, and muni markets are independent and they stand on their own, but at the same time, they look for these other markets for support. And when you see a dynamic market like this, where things are constantly changing, it's difficult to try and establish those more traditional relationships," Iltz said.
Additionally, "new muni issuance is hitting as rates rise, and Chicago postponing part of its sale highlights the challenging environment," said James Pruskowski, managing director at Hennion & Walsh.
Congress is also "debating larger defense and national security spending [which] adds debt and rate pressure, while today's soft 10-year auction reflects ongoing supply and inflation concerns," he said.
Absolute rates remain attractive, but prices have "run ahead of themselves, and seasonal headwinds are here," Pruskowski said.
Headline risk is rising as major states face budget challenges, with Moody's revising the outlook to negative on New York City's Aa2 rating highlighting the pressure, he said.
"Private credit problems are also on the market's radar, raising the broader question of whether this is an isolated issue or signs of wider liquidity stress," Pruskowski said.
Munis are "fundamentally on track, but careful navigation is key," he said.
New-issue market
In the primary market Wednesday, RBC Capital Markets preliminarily priced for California (Aa2/AA-/AA/) $2.394 billion of various purpose general obligation bonds. The first tranche, $1.4 billion of new-money bonds saw 5s of 10/2028 at 2.19%, 5s of 2036 at 2.89%, 5s of 2042 at 3.53%, 5s of 2046 at 4.08%, 5.25s of 2051 at 4.30%, 4.125s of 2051 at 4.45% and 5s of 2056 at 4.47%, callable 4/1/2036.
The second tranche, $994.26 million of refunding bonds, saw 5s of 10/2026 at 2.14%, 5s of 2031 at 2.35%, 5s of 2035 at 2.77%, 4s of 2041 at 3.60% and 5s of 2047 at 4.19%, callable 4/1/2036.
Morgan Stanley priced for the University of Texas System Board of Regents (Aaa/AAA/AAA/) $250 million of revenue financing system bonds, Series 2026B, Subseries 2026B-1, with 2.45s of 8/2056 at par.
In the competitive market, the Omaha Metropolitan Utilities District, Nebraska, (Aa2/AA+//) sold $269.4 million of water system revenue and refunding bonds, to BofA Securities, with 5s of 12/2026 at 2.23%, 5s of 2031 at 2.44%, 5s of 2036 at 2.95%, 5s of 2041 at 3.43%, and 4.125s of 2046 at 4.271%, callable 12/1/2035.
Westchester County, New York, (Aa1/AAA/AAA/) sold $222.86 million of GOs, to BofA Securities, with 5s of 3/2028 at 1.95%, 5s of 2031 at 2.05%, 5s of 2036 at 2.65%, and 4s of 2041 at 3.51%, callable 3/15/2034.
AAA scales
MMD's scale was cut up to eight basis points: 2.12% (unch) in 2027 and 2.13% (unch) in 2028. The five-year was 2.31% (+6), the 10-year was 2.79% (+8) and the 30-year was 4.31% (+2) at 3 p.m.
The ICE AAA yield curve was cut one to eight basis points: 2.17% (+1) in 2027 and 2.19% (+2) in 2028. The five-year was at 2.34% (+4), the 10-year was at 2.80% (+8) and the 30-year was at 4.33% (+2) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut up to six basis points: The one-year was at 2.12% (unch) in 2027 and 2.13% (unch) in 2028. The five-year was at 2.30% (+5), the 10-year was at 2.75% (+6) and the 30-year yield was at 4.30% (+2) at 3 p.m.
Bloomberg BVAL was cut one to six basis points: 2.15% (+1) in 2027 and 2.16% (+2) in 2028. The five-year at 2.28% (+4), the 10-year at 2.72% (+6) and the 30-year at 4.24% (+3) at 4 p.m.
U.S. Treasuries were weaker.
The two-year UST was yielding 3.645% (+5), the three-year was at 3.6665% (+5), the five-year at 3.797% (+6), the 10-year at 4.225% (+7), the 20-year at 4.757% (+8) and the 30-year at 4.875% (+9) near the close.
CPI
CPI offered no surprises and was generally ignored by the market since surging oil prices in the face of hostilities in the Middle East remain the focus, since it is likely to cause a spike in future inflation reads.
"Stock and bond prices are lower on the news and the U.S. dollar higher despite the steady headline prints, likely in anticipation of added, war-related pressure on CPI to come," said Gary Schlossberg, global strategist at Wells Fargo Investment Institute.
Fed funds futures still expect two rate cuts this year, with the first now expected in October, he said.
James Knightley, chief international economist at ING, agreed. "While on balance the report is a pretty good outcome, reaction has been limited given concerns about how developments in the Middle East are likely to mean inflation moves higher in the next few months."
Still, the report "will do little to move markets," said Karen Manna, fixed income investment director at Federated Hermes. "With attention centered on the Iran conflict and oil price dynamics, a consensus level inflation number simply doesn't change the macro narrative."
With the geopolitical uncertainty, she said, "markets are treating this release as background noise."
The data was "already largely stale," said Josh Jamner, senior investment strategy analyst at ClearBridge Investments. "We expect financial markets to have a limited reaction."
But the report itself "confirms inflation is stabilizing, not surging," said Gina Bolvin, president of Bolvin Wealth Management Group. "That's exactly what markets needed to see. The Fed still has work to do, but the panic phase of the inflation cycle is behind us."
"This is a welcomed number on the surface, but one that may already be outdated," said Alexandra Wilson-Elizondo, global co-CIO of multi-asset solutions at Goldman Sachs Asset Management. "February's data was collected before the conflict in Iran sent crude oil surging roughly 30%, with natural gas, aluminum, fertilizer, freight rates and shipping insurance moving higher with it."
While it was "good news" that inflation was as expected, Northlight Asset Management Chief Investment Officer Chris Zaccarelli said, "However, this is backward-looking data from before the war in Iran began."
While the Federal Reserve has generally ignored this kind of "energy‑driven price spikes," Seema Shah, chief global strategist at Principal Asset Management, said, "with inflation having sat above target for almost five years, it may be harder to do so this time."
Her base case — two cuts in the last half of the year — "would be at risk if energy prices remain high and the conflict drags on."
Jeffrey Roach, chief economist at LPL Financial, said, "Investors will likely look past this report because [Wednesday's] report was based on data collected before the war in the Middle East."
The Federal Open Market Committee will hold rates when it meets next week, he said. "The potentially market-moving information will be embedded in the updated Summary of Economic Projections (SEP)," Roach added. "It's likely that the SEP will give a stagflationary signal as policymakers will likely revise up inflation forecasts and revise down the growth outlook. But an important nuance to it all is the second half of 2026 should look very different than the first half. Investors must be patient in times like these."
Primary to come
The Minnesota Municipal Gas Agency (Baa1///) is set to price $750 million of gas project revenue bonds, Series 2026A. J.P. Morgan.
The Florida Development Finance Corp. is set to price Thursday $120 million of nonrated AMT solid waste disposal revenue remarketing bonds (Waste Pro USA, Inc. Project), Series 2023. Barclays.
The Missouri Public Utilities Commission is set to price Thursday $110 million of interim construction notes, Series 2026. D.A. Davidson.
Competitive
Huntsville, Alabama, is set to sell $189.86 million of GO warrants, Series 2026A, at 10 a.m. Eastern Thursday.
