Munis were a touch firmer in spots Thursday as inflows into muni mutual funds topped $2 billion, the largest figure in over four months. Short-term U.S. Treasuries richened slightly and equities ended mixed.
The two-year muni-UST ratio Thursday was at 61%, the five-year at 59% the 10-year at 62% 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 58%, the 10-year at 63% and the 30-year at 88%, according to ICE Data Services.
Over the past five years, January has seen a relatively stable market tone, said Jeff Timlin, managing partner and head of municipal bond investing at Sage Advisory.
"There's stability, positive returns for the month in general, with the back end underperforming, which again lends itself to valuations being more favorable in the back end and being really one of the last bastions of opportunity in muniland," he said.
For the most part, everything's fairly priced or rich, like it is across most asset classes, Timlin said.
Issuance slowed this week, impacted by the Federal Open Market Committee meeting and market participants recalibrating at the end of the month. For the latter, the thought being issuers want to defer until February, he said.
January will end with issuance near $35 billion, close to last January's total and at the upper end of the past decade's range, said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
This comes after two years of record issuance, during which time there has been an "orderly" market, though there was a bit of a disruption around the 'Liberation Day' window, said Cameron Parks, head of public finance origination at Truist.
Part of the surge in supply in 2024 and 2025 — expected to continue this year — is the increased number of billion-dollar deals, he said.
Several years ago, these mega deals were less common, but now market participants don't "even blink" when there may be three sizable deals in a week, Parks said.
The muni curve is pretty steep, especially in the 10- to 20-year range, he said.
"That steepness of the curve provides enough variety, maybe draws SMAs a little farther, but also other investors look at and say, 'I can get another 10, 15, 20 basis points,'" Parks said.
The steepening of the curve is "accentuated by these dynamics. You have retail, short, intermediate bond funds and so forth, and then out on the front end dragging ratios lower. But out long, the buyer base narrows quite a bit," he said.
Currently, munis are "well positioned," though February and March are traditionally softer periods, when there's a shift from a seller's market to a buyer's market, Timlin said.
Those months, along with April, will see fewer maturity coupon payments that come due.
If inflows don't offset that and supply picks up, then "you should see a softer market where spreads, and maybe the rates adjust accordingly," Timlin said.
Toward the end of March and into April is tax season, that may be a period where there are several weeks with a "temporary pause," as people utilize their muni portfolios to fund tax liabilities, he said.
"We're getting into a general seasonal period of softness in munis that lasts until sometime into May. The magnitude of that will depend on both supply coming to market and the fund flows," Timlin said, noting that if strong inflows into mutual funds continue, that should reduce the potential upcoming softness.
In the primary market Thursday, Goldman Sachs priced for the Black Belt Energy Gas District (Aa2///) $719.525 million of gas project revenue bonds, 2026 Series B, with 5s of 12/2030 at 3.45%, 5s of 2031 at 3.55% and 5s of 2034 at 3.89%, callable 9/1/2034.
Fund flows
Investors added $2.062 billion to municipal bond mutual funds in the week ended Wednesday, following $993.6 million of inflows the prior week, according to LSEG Lipper data. This is the largest inflow total since the week ending Sept. 10.
High-yield funds saw inflows of $485.7 million compared to inflows of $351.2 million the previous week.
Tax-exempt municipal money market funds saw outflows of $4.059 billion for the week ending Jan. 26, bringing total assets to $143.769 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 1.21%.
Taxable money-fund assets saw $11.778 billion added, bringing the total to $7.536 trillion.
The average seven-day simple yield was 3.37%.
The SIFMA Swap Index was at 2.28% on Wednesday compared to the previous week's 1.31%.
AAA scales
MMD's scale was bumped up to two basis points: 2.18% (unch) in 2027 and 2.18% (unch) in 2028. The five-year was 2.25% (-2), the 10-year was 2.64% (-1) and the 30-year was 4.29% (unch) at 3 p.m.
The ICE AAA yield curve was little changed: 2.19% (-1) in 2027 and 2.18% (-1) in 2028. The five-year was at 2.22% (-1), the 10-year was at 2.68% (unch) and the 30-year was at 4.26% (unch) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped up to two basis points: The one-year was at 2.17% (-1) in 2027 and 2.17% (-1) in 2028. The five-year was at 2.26% (-1), the 10-year was at 2.65% (-2) and the 30-year yield was at 4.24% (unch) at 3 p.m.
Bloomberg BVAL was bumped up to two basis points: 2.23% (-1) in 2027 and 2.20% (-1) in 2028. The five-year at 2.22% (-1), the 10-year at 2.61% (-1) and the 30-year at 4.16% (-1) at 4 p.m.
Treasuries richened slightly 10 years and in.
The two-year UST was yielding 3.554% (-2), the three-year was at 3.622% (-2), the five-year at 3.808% (-2), the 10-year at 4.228% (-2), the 20-year at 4.809% (-1) and the 30-year at 4.852% (flat) near the close.
FOMC redux
Although the Federal Open Market Committee Meeting went as expected, analysts read much into Fed Chair Jerome Powell's press conference.
"Powell implied the Fed could well be on hold, rather than paused, at the current level of rates," said FHN Financial Chief Economist Chris Low. "That's an important distinction. A pause implies more cuts to come. On hold does not."
Should this appear true, "in March, the forward curve will reprice, because there are still rate cuts priced in the curve now. In other words, a pretty momentous shift in forward guidance [Wednesday] went unnoticed — for now — thanks to Powell's casual nonchalance."
Still, the bond market didn't react much to Powell's remarks, said Ryan Swift, U.S. bond strategist at BCA Research, with two 25-basis-point rate cuts over the next 12 months priced in — one in July, the other in December.
"Our view is that market pricing of a stable funds rate in the first half of this year is close to correct, but dovish surprises are likely in the second half," Swift said.
"We anticipate more easing than the 50 bps that is currently priced in the market," he said. "U.S. bond investors should hold long-duration positions, Treasury curve steepeners, and long positions in December 2026 or January 2027 fed funds futures contracts."
Justin Bergner, portfolio manager at Gabelli Funds, noted, "Powell seemed more confident that labor markets, while potentially soft (depending on the rate of underlying population growth), were not showing signs of further weakening."
While appearing "modestly hawkish" at times, Powell "avoided the elephant in the room, namely the weakening U.S. dollar, saying that currency considerations are the job of the Treasury and not the Fed," Bergner said.
"The unemployment rate has stabilized and inflation remains sticky with uncertainty lingering around tariff policy," noted Eric Teal, chief investment officer at Comerica Wealth Management. "There is justification for the wait and see approach given the potential for a second wave" of higher prices as the tariff pass-through rate increases."
The statement lacked "language about risks to the job market … but Powell personally mentioned that labor demand had clearly softened," noted Northlight Asset Management Chief Investment Officer Chris Zaccarelli.
With less concern about labor market softening and inflation persistently above target, "it makes sense that the Fed would leave rates unchanged," he said.
Northlight expects no rate cuts before May.
The shift in sentiment about the labor market was notable, according to Charlie Ripley, senior investment strategist at Allianz Investment Management. "We saw this meeting as an affirmation from the Fed of what investors were already thinking. Labor conditions are not worsening, growth has accelerated, and inflation has steadied for now. To put it in other words, policy rates are much closer to neutral against the current backdrop, and it's time for a long pause."
"The updated language on the labor market signals no urgency to cut again — so we don't expect another move under Powell," said Angelo Kourkafas, senior global strategist of investment strategy at Edward Jones.
"The easing bias is still there, but this pause could give the dollar a lift and keep the 10‑year anchored in the upper half of that 4% to 4.5% range," he said.
Gary Siegel contributed to this article.
