Municipals weakened slightly Monday morning in the wake of
The muni market is seeing little fallout from Moody's downgrade, said Ajay Thomas, head of public finance at FHN Financial, noting the market may be reacting more toward
Maryland GOs have often been looked at historically as a "bellwether" in the MMD scale, "so you may see muni credits in other states reprice off of that action more so than the United States' downgrade," he said.
Municipals were cut up four basis points, depending on the curve, through noon.
MMD's scale was cut between zero to two basis points. The two-year was at 2.84%-2.86%, the 10-year at 3.27%-3.29% and the 30-year at 4.43%-4.45% at the most recent reading.
The ICE AAA yield curve was one to four basis points: the two-year at 2.83% (+1), the 10-year at 3.29% (+3) and the 30-year at 4.43% (+3) at noon.
Bloomberg BVAL was two to four basis points: 2.89% (+2) in 2027, 3.32% (+3) in 2035 and 4.42% (+3) in 2055 at noon.
There will be more of a reaction in USTs, Thomas said.
At the start of the day, USTs moved higher, with the 30-year UST topping 5%. However, by noon, UST yields retreated slightly.
USTs saw small cuts out long. The two-year UST was at 3.987% (-2), the 10-year at 4.492% (+1) and the 30-year at 4.963% (+2) at 11:45 a.m.
The rating agency attributed the downgrade to an "increase over more than a decade in government debt and interest payment ratios and levels that are significantly higher than similar rated sovereigns."
Over a decade later, in August 2023,
Fitch also downgraded certain municipal bonds tied directly to the creditworthiness of the federal government.
Moody's downgrade came late Friday afternoon, resulting in a "modest sell-off in stocks and bonds," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
The 10-year UST moved higher three basis points, and the sell-off was led by the long-end, she said.
"To be clear, it is hard to read too much into the late-day price action (on Friday) when liquidity was poor," Rajappa said. "Equities had a good week following the 90-day pause on China tariffs announced last weekend and the selloff following the downgrade (<0.5% in the S&P) is not meaningful."
While markets may react negatively to Moody's downgrade, it may be more "muted and contained" than the response seen in 2011, when S&P lowered the U.S. rating, said Tom Kozlik, managing director, head of public policy and municipal strategy at HilltopSecurities.
"This move doesn't introduce new information; rather, it represents the latest step in a ratings process that began roughly 18 months ago," he said.
The downgrade makes this week's $10-billion-plus tax-exempt calendar more of a challenge, "increasing the probability of ETF outflows against the already challenging backdrop of waning mid-month reinvestment and less compelling relative value," said J.P. Morgan strategists, led by Peter DeGroot.
Supportive fund flows and cheaper valuations coming into May have "controlled the narrative, and inflows will be essential to digest elevated volume over the second half of [this month]," they said.
For investors, Kozlik noted the downgrade "serves more as a warning — or even a confirmation — than a surprise, with some fiscal concerns likely already priced into the market compared to 14 years ago."
However, from a broader public and political perspective, "the downgrade could reignite debate over U.S. fiscal policy and governance, potentially heightening political tensions in the near term," he said.
