Munis sold off Thursday as the weakness over the past several days culminated in the largest cuts in months amid ongoing tensions in the Middle East and rising oil prices.
Muni yields were cut eight to 13 basis points, depending on the curve, while UST yields rose two to six basis points, pushing the two-, three-, five-, seven- and 10-year USTs to yearly highs.
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.
"Escalating U.S.-Iran tensions are lifting both oil prices and Treasury yields, while concerns that AI capex is outpacing monetization are weighing on broader risk appetite," said James Pruskowski, managing director at Hennion & Walsh.
Munis are seeing the "spillover effects," which have reduced secondary market liquidity ahead of next week's Federal Open Market Committee meeting and cheapened rates and ratios, he said.
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.
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.
Fund flows
Investors added $174 million into municipal bond mutual funds in the week ended Wednesday, following $1.36 billion of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw outflows of $91.2 million compared to inflows of $265.5 million the previous week.
Tax-exempt municipal money market funds saw inflows of $1.031 billion for the week ending July 20, bringing total assets to $147.363 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 was 2.26%.
Taxable money-fund assets saw $21.297 billion pulled, bringing the total to $7.702 trillion.
The average seven-day simple yield was 3.35%.
The SIFMA Swap Index was at 2.55% on Wednesday compared to the previous week's 2.91%.
New-issue market
In the primary market Thursday, Wells Fargo priced for the National Finance Authority (/AA//) $162.335 million of impact municipal certificates, with 5.1s of 12/2042 at 4.97%.
In the competitive market, Dallas, Texas, (/AAA/AA/), sold to Jefferies $189.43 million of waterworks and sewer system revenue refunding bonds, with 5s of 10/2027 at 2.60%, 5s of 2031 at 3.10%, 5s of 2036 at 3.62%, 5s of 2041 at 4.05%, 5s of 2046 at 4.43%, 5.25s of 2051 at 4.60% and 5s of 2055 at 4.80%, callable 10/2036.
Christy Baker contributed to this report.
