Municipals were little changed Thursday as inflows into muni mutual funds continued, topping $1 billion for the second consecutive week. U.S. Treasury yields rose and equities ended up.
The two-year ratio Thursday was at 74%, the five-year at 74%, the 10-year at 76% and the 30-year at 91%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 75%, the five-year at 76%, the 10-year at 76% and the 30-year at 91% at 4 p.m.
The recent firmness in the market has been "much appreciated," said Shannon Rinehart, senior portfolio manager of municipal debt at Columbia Threadneedle Investments.
Last month saw exceptional volatility, largely driven by technical and structural changes within the market, she said.
"We came into an unfortunate collision of timing wherein we faced headwinds from just a demand perspective, and the heightened supply continued, and then with the tariff news, it wasn't readily absorbed," Rinehart said.
However, some of the technical headwinds will dampen the muni market, she said.
"We're hoping that will lead to some additional recovery, as well as healthy demand for a heightened supply calendar," Rinehart said.
Issuance predictions for 2025 spanned from $480 billion to $745 billion, with most firms anticipating that issuance this year will be on pace, if not surpass, 2024's record-breaking total.
Vikram Rai, who was head of municipal strategy at Wells Fargo at the time of his prediction, forecast supply of $500 billion, with the possibility of issuance surpassing $550 billion if there was an "upside surprise" because of several factors, most importantly the threat to the tax exemption.
Supply, though, could surge to $750 billion if the market experiences something akin to 2017, when advanced refundings were taken away, at which point the pipeline got "emptied out" and there was a slew of issuance, Rai,
Also helping 2025 issuance is cash-strapped state and local governments may face additional pressure in the future and need to tap the capital markets, he noted.
On the other hand, there's "this possibility that issuers look and they say, 'OK, the economy in general is deteriorating. The market is now pricing in, at least pre-Fed meeting, three to four rate cuts. Maybe we wait for lower rates to issue more bonds and pause some of these technical headwinds that we've seen,'" said Jason Appleson, head of municipal bonds at PGIM, at the Bloomberg summit.
After all, the market is in a season where issuers tend to issue less and reinvestment tends to be higher, he said.
In the primary market Thursday, Barclays priced for the Connecticut Health and Educational Facilities Authority (Aaa/AAA//) on behalf of Yale University $500 million of revenue bonds. The first tranche, $200 million of Series B-1, saw 5s of 7/2064 with a mandatory tender of 7/1/2030 at 3.28%, noncall.
The second tranche, $200 million of Series B-2, saw 5s of 7/2064 with a mandatory tender of 7/1/2032 at 3.40%, noncall.
The third tranche, $100 million of Series B-3, saw 5s of 7/2064 with a mandatory tender of 7/2/2035 at 3.66%, noncall.
Jefferies priced for the New Hampshire Health and Education Facilities Authority (/A/A/) on behalf of the Dartmouth Health Obligated Group $414.605 million of revenue bonds, with 5s of 8/2031 at 3.60%, 5s of 2035 at 3.91%, 5s of 2040 at 4.41%, 5s of 2045 at 4.84%, 5.5s of 2050 at 4.96%, 5.25s of 2055 at 5.10%, callable 8/1/2035.
Morgan Stanley priced for the Massachusetts Development Finance Agency (Baa3//BBB-/) on behalf of Suffolk University $157.13 million of revenue bonds, with 5.5s of 7/2041 at 5.00%, 5.5s of 2045 at 5.20%, 6s of 2050 at 5.26% and 5.25s of 2055 at 5.43%, callable 7/1/2035.
In the competitive market, the Beaufort County School District, South Carolina, (Aa1/AA//) sold $132.2 million of GOs, Series 2025B, to BofA Securities, with 5s of 3/2027 at 2.94%, 5s of 2030 at 3.03%, 5s of 2035 at 3.41%, 3s of 2040 at 4.05%, 4.375s of 2045 at par and 4.625s of 2050 at par, callable 3/1/2035.
Fund flows
Investors added $1.058 billion to municipal bond mutual funds in the week ended Wednesday, following $1.574 billion of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $347.8 million compared to the previous week's inflows of $232.4 million.
Tax-exempt municipal money market funds saw inflows of $3.47 billion for the week ending May 6, bringing total assets to $143.19 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 fell to 2.43%.
Taxable money-fund assets saw $42.48 billion added, bringing the total to $6.764 trillion.
The average seven-day simple yield was at 4.00%.
The SIFMA Swap Index fell to 1.74% on Wednesday compared to the previous week's 2.78%.
AAA scales
MMD's scale was little changed: The one-year was at 2.88% (-1) and 2.89% (-1) in two years. The five-year was at 2.97% (-1), the 10-year at 3.31% (unch) and the 30-year (unch) at 4.38% at 3 p.m.
The ICE AAA yield curve was little changed: 2.84% (-1) in 2026 and 2.86% (unch) in 2027. The five-year was at 2.96% (unch), the 10-year was at 3.28% (unch) and the 30-year was at 4.37% (+1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.87% (-1) in 2025 and 2.88% (-1) in 2026. The five-year was at 2.97% (-1), the 10-year was at 3.31% (unch) and the 30-year yield was at 4.37% (unch) at 4 p.m.
Bloomberg BVAL was little changed: 2.84% (-1) in 2025 and 2.89% (-1) in 2026. The five-year at 3.00% (-1), the 10-year at 3.31% (unch) and the 30-year at 4.37% (unch) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 3.894% (+12), the three-year was at 3.871% (+13), the five-year at 3.991% (+13), the 10-year at 4.376% (+11), the 20-year at 4.86% (+8) and the 30-year at 4.84% (+7) near the close.
FOMC redux
In the wake of the Federal Open Market Committee meeting and Federal Reserve Chair Jerome Powell's press conference, most analysts doubt whether rate cuts will occur this year.
"We still expect no rate cuts in 2025, with back-loaded cuts in 2026 that bring the policy rate to 2.50-2.75%," said Morgan Stanley analysts. "Our rates strategists suggest investors maintain positions for a steeper yield curve — UST 3s30s steepeners and term SOFR 1y1y vs. 5y5y steepeners — as we expect a lower market-implied trough rate."
Agreeing rates will hold through this year, BNP Paribas Chief U.S. Economist James Egelhof noted, "Absent a decisive turn in U.S. economic data, the FOMC seems comfortable remaining on hold indefinitely."
He suggested the next move could be a rate hike. "If it were obvious that the next move is a cut, Chair Powell would have cut already," Egelhof said. "The problem is that this isn't obvious at all."
"The likelihood of rate cuts this year is pretty much off the table … for now," said Mark Malek, CIO at Siebert Financial.
Officials are concerned about stagflation, since "they can't fix it with their 'interest rate tool,'" he said. "If they raise rates to throttle back inflation, they run the risk of increasing unemployment. If they cut rates to stimulate hiring, they run the risk of re-igniting inflation."
The Fed has "no ammunition," Malek said. "This can only mean one thing. It is simply, in Powell's own words, appropriate to wait and see."
While Powell wasn't willing to call any tariff-driven inflation transitory, Ryan Swift, U.S. bond strategist at BCA Research, said, "We don't see the tariff shock to inflation lasting beyond the next few months."
Powell's remarks suggest a "dovish Fed policy won't prevent a U.S. recession and it will require a meaningful rise in the unemployment rate before the Fed cuts rates," he said.
As such "bond investors should keep portfolio duration above-benchmark and hold 2-year/10-year Treasury curve steepeners in anticipation of a U.S. recession this year."
Trade policy, rather than a Fed mistake, remains the greater risk to the markets, said Charlie Ashley, a portfolio manager at Catalyst Funds. "Fed policy can certainly exacerbate a market move, but the outcomes of trade negotiations [are] what will be the main driver of market direction in the near-term."
But the Fed's "misstep" on inflation during the COVID pandemic "casts a shadow on any current consideration to cut preemptively," said Ali Hassan, portfolio manager at Thornburg Investment Management.
"Powell has emphasized that maintaining anchored inflation expectations underpins long-term inflation and growth," he said. "So, the consensus is that the Fed is unlikely to make such a move without more evidence."
Hassan believes a June cut is possible, "and when they start to make a move, the cuts may have to run deep to catch up to slowing growth and stimulate consumption. After all, if higher rates didn't hit consumers and companies that locked in favorable financing, then, in the opposite direction, it may require deeper cuts to stimulate debt-fueled demand."
Indeed, it seems "the Fed is trying to avoid making a policy mistake," said JoAnne Bianco, partner and investment strategist at Bondbloxx. "They want more time to determine whether to focus on one side of their dual policy mandate (price stability and maximum employment) over the other."
Gary Siegel contributed to this story.
