Munis were steady as U.S. Treasuries saw gains and equities ended higher after the Federal Reserve cut rates 25 basis points at its December meeting.
The Fed also announced it will begin buying short-term T-bills on Dec. 12.
"The reversal from quantitative tightening to the addition of new fixed-income instruments is akin to quantitative easing, and is music to the ears of stock bulls, as it bolsters liquidity conditions and adds fuel to the fire of some of the most speculative areas in equities," said José Torres, senior economist at Interactive Brokers. "The yield curve is plunging in a bull steepening fashion, led south by the monetary policy-sensitive front end, while today's accommodative tilt is sending commodities north due to stronger growth projections."
The two-year muni-UST ratio Wednesday was at 68%, the five-year at 64%, the 10-year at 66% and the 30-year at 88%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 68%, the five-year at 64%, the 10-year at 67% and the 30-year at 87% at a 4 p.m. read.
The Investment Company Institute Wednesday reported inflows of $253 million for the week ending Dec. 3, following $217 million of inflows the previous week.
Exchange-traded funds saw inflows of $392 million after $1.089 billion of inflows the week prior, per ICI data.
Following the quarter-point rate cut, UST yields were firmer after closing higher for the previous five straight sessions. Muni yields were little changed, as they have barely moved over the past several trading sessions, said Kim Olsan, senior fixed income portfolio manager at NewSquare.
"Municipals can remain insulated to the extent that ratios don't become prohibitive at a time when reinvestment demand begins to trail off, bringing into question the value of positioning in the last two weeks of the year," she said.
"Parts of the curve have seen the script flip from recent weeks," Olsan wrote. "1–3 year bonds are 2–4 ratios above their 90-day averages, but the 10–20 year range sits 4–5 ratios below 90-day averages, as recent activity shows short bonds becoming oversold and longer bonds now overbought."
Olsan considered the possibility that 10-year AAA yields will rally in December — it's happened four times since 2016, she noted. Intermediate yields are higher now than they were at "any late-year level other than December 2024," she wrote, "albeit at more stretched relative values."
"A tentative cycle of supply and demand places greater value on taxable-equivalent yields," she said. "In high-tax states, the combination of strong credit quality and favorable TEYs forms more of a protective barrier."
To illustrate the importance of TEYs, Olsan compared two recent university bond pricings.
The University of California (Aa2/AA/AA/) priced an upsized $2.2 billion of bonds on Tuesday, while Texas A&M University priced a $223 million deal.
"The UCAL 10-year yield was 2.72%, or 19 basis points through the A&M yield," Olsan wrote. "Given the elevated tax structure in California (top rate near 55%), the TEY would be just below 6.00% and more than 100 basis points above the Texas TEY."
The 15-year maturities had a smaller yield gap, but the difference in TEYs was widened by 160 basis points. For UCAL, a TEY near 7.5% "netted" about 330 basis points over the 10-year UST, according to Olsan.
The TEY advantage could grant greater price protection in California, New York, New Jersey, and Massachusetts, Olsan wrote.
AAA scales
MMD's scale was little changed: 2.48% (unch) in 2026 and 2.43% (unch) in 2027. The five-year was 2.43% (unch), the 10-year was 2.77% (unch) and the 30-year was 4.22% (+1) at 3 p.m.
The ICE AAA yield curve was cut up to a basis point: 2.48% (unch) in 2026 and 2.45% (unch) in 2027. The five-year was at 2.41% (unch), the 10-year was at 2.80% (+1) and the 30-year was at 4.19% (+1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.48% in 2025 and 2.43% in 2026. The five-year was at 2.43%, the 10-year was at 2.77% and the 30-year yield was at 4.19% at 3 p.m.
Bloomberg BVAL was little changed 2.50% (unch) in 2025 and 2.45% (unch) in 2026. The five-year at 2.38% (unch), the 10-year at 2.73% (unch) and the 30-year at 4.12% (+1) at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 3.535% (-8), the three-year was at 3.579% (-8), the five-year at 3.723% (-7), the 10-year at 4.142% (-5), the 20-year at 4.75% (-3) and the 30-year at 4.785% (-2) near the close.
FOMC
As expected, the Federal Open Market Committee lowered the fed funds rate target by 25 basis points to a range of 3.5% to 3.75%, with three voters dissenting, while the post-meeting statement was adjusted to suggest a pause at its next meeting.
"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks," according to the statement. This is the same verbiage used before the last pause.
The updated dot plot in the Summary of Economic Projections showed six officials wanted rates held at this meeting (some are non-voters), with one more not wanting rates lower next year and 11 wanting no more than one rate cut next year. The dot plot also suggests one cut in 2027.
Gov. Stephen I. Miran voted against the cut, preferring a 50-basis-point reduction, while Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid, wanted rates held. This was the first time since 2019 that there were three dissenting votes at one meeting.
Core inflation projections for next year were lowered slightly to 2.5%, while the gross domestic product forecast jumped to 2.3% from 1.8% in the last SEP.
In his press conference, Fed Chair Jerome Powell said the Fed rate is now "within a broad range of estimates of neutral." He added the Fed is well-positioned.
The Fed will have to be skeptical of incoming data since it may be "distorted by technical factors" related to data collection, or lack of it, during the government shutdown.
A rate hike is no one's base case for the next move, Powell said in response to a question.
Powell asserted the Fed will get inflation down to 2%. "Tariffs are causing most of the inflation overshoot," he said, adding inflation without tariffs would be in the low 2s-range.
"Neither Powell's comments nor the dot plot should matter for markets," said Brad Conger, chief investment officer at Hirtle Callaghan. "Our view is that the job market is slowing. ... The labor weakness will pressure inflation lower (slowly) and justify further cuts. It's likely that Mr. Hassett will inherit a fed funds at 3%. We remain long duration."
The move shows "the Fed has made a clear priority — easing pressure on the labor market," said Richard Flax, chief investment officer at Moneyfarm. "By cutting rates, the Fed aims to provide some relief in an economy still wrestling with uncertainty."
Richard Flynn, managing director at Charles Schwab UK, said, "By acting preemptively, the Fed is signaling caution in the face of mounting downside risks, particularly as global growth remains sluggish and policy uncertainty persists."
Investors should see this as "a measured adjustment rather than a dramatic pivot," he said. "While the cut could offer near-term support for risk assets, and potentially fuel a seasonal Santa rally, volatility is likely to remain elevated as markets assess the implications for future policy and the broader economic outlook."
But this is the last move that can be termed an insurance cut, said Kay Haigh, global co-head of fixed income and liquidity solutions for Goldman Sachs Asset Management. "The onus is on labor market data to weaken further to justify additional near-term easing."
The dot plot and the dissents "highlight the Fed's hawkish bloc," Haigh said.
While future cuts are possible, "labor market weakness will have to clear a high bar," Haigh said.
The markets are focused on future policy, having priced in this cut, said Jeff Schulze, head of economic and market strategy at ClearBridge Investments.
"The Fed dots continued to show a single rate cut in 2026, but with an improved economic outlook that reflects higher growth and lower inflation, a goldilocks type scenario," he said. "The Fed's one rate cut outlook continues to be at odds with pre-meeting futures market pricing of two rate cuts in 2026. While we agree with the Fed that the need for further monetary support is limited, we caution investors to put less weight than normal on the dots since a new Fed chair will be at the helm starting in May. Put differently, the outlook from the Powell-led FOMC bears less than usual on future Fed policy decisions given the imminent change in leadership."
"The window of opportunity for further cuts, if truly data dependent, may be shrinking as we move into 2026," said Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute. "However, since the verdict on the state of the economy is still not out, we believe there is potential for two additional cuts in early 2026 as the Fed still attempts to reach a neutral policy rate, that is a policy that is neither restrictive nor stimulative."
The divergence of opinions on the Fed is obvious, he said. "The next few months could potentially be influenced by the anticipated changes in Fed leadership, but still, our belief is that investors should remain focused on trendlines (the goal to reach neutral) over headline hype (who the new Fed chair will be, and any changes in Fed regional presidents)."
"The projections published from this meeting show the committee does not see a clear path, with members indicating slightly faster growth, but similarly elevated inflation and a fed funds rate path that matches the September projections," said Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni.
Primary to come
The
The Wisconsin Health and Educational Facilities Authority is set to price Thursday $627.885 million of Mercy Health Corp. refunding revenue bonds, consisting of $126.35 million of Series 2025A, $401.535 million of Series 2026A, $100 million of Series 2026B and $100 million of Series 2026C. Ziegler.
The Public Finance Authority is set to price Thursday $248.925 million of Tech Tower project multifamily housing revenue bonds, consisting of $202.45 million of Series 2025A, $3.085 million of Series 2025T and $43.39 million of Series 2025B. D.A. Davidson.
The MIDA Mountain Village Public Infrastructure District is set to price Thursday $125.205 million of tax allocation revenue bonds, consisting of $101.5 million of Series 2025-1 bonds and $23.705 million of Series 2025-2 convertible capital appreciation bonds. Stifel, Nicolaus & Co.
Jessica Lerner and Gary Siegel contributed to this report.
