Municipals were steady Tuesday as U.S. Treasuries richened slightly and equities ended mixed after release of the nonfarm payroll report.
"After months of anticipation for official government employment data, consensus market forecasts proved remarkably accurate," noted Kevin O'Neil, associate portfolio manager and senior research analyst at Brandywine Global. "Bond bears likely will point to the continued strength in private payroll growth, while bond bulls will highlight the modest uptick in the unemployment rate, which reached the highest level in over a decade, driven by reentrants."
While the data is soft enough to justify the Federal Reserve's rate cuts, he said, they offer "little support for significantly deeper easing ahead."
Inflation reports may drive markets in 2026 since the labor market is "sending mixed messages," O'Neil said.
The two-year muni-UST ratio Tuesday was at 70%, the five-year at 66%, the 10-year at 67% 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 69%, the five-year at 64%, the 10-year at 66% and the 30-year at 86% at a 4 p.m. read.
Munis seem "poised" to steepen, though the muni curve was mostly unchanged last week, while offered side benchmarks followed USTs more closely, said Matt Fabian, president of Municipal Market Analytics.
"The disjuncture is reasonable with current uncertainty over longer maturity bond yields (via UST, corporate, and municipal supply; still unclear inflation and economic trends; and worries over Fed and Treasury policies that could undermine bond values)," he said.
But this remains almost entirely "exogenous pressure" for munis, which saw issuance soar to $14 billion last week, the final week of elevated volume this year, Fabian said.
Issuance year-to-date is at $558.549 billion, up 13.4% year-over-year, according to LSEG Lipper.
"Typical yearend tax swapping activity is visible in elevated customer sold par totals during the last few weeks but also in the trade count data (>350K) amid growth of tax-aware [separately managed accounts]," Fabian said.
Muni resilience "may reflect investor optimism over yearend seasonal trends, or simply a need to keep retail portfolios invested amid their own short-maturity/rapid-runoff orientation," he said.
Sans more "pointed" UST declines, internal sector trends could "prevail over the next few weeks, even if lower/richer muni-UST ratios fuel hesitation among crossover/total rate return buyers," Fabian said.
Compared to last year, there are "underwhelming" reinvestment expectations in January and February, he said.
CreditSights estimates January redemptions at $18.4 billion and February redemptions at $24.2 billion.
Elsewhere, new 5% and higher coupons this year reached a 30-year high at 84% of all fixed-rate, tax-exempt issuance, up from 78% in 2024 and 2023, said Fabian.
"In dollar terms, total issuance of tax-exempt 5s or higher was $425 billion: nearly $80 billion more than last year and above most years' total for gross issuance at all coupons and tax types," he said.
The change reflects the "dominant retail/SMA client demand for defensive, lower duration couponing structures that minimize potential statement losses and/or volatility from rising rates," Fabian said.
"It also highlights: a) the negative space left by crossovers and active fund managers that typically rely on capital gains to outperform an index or the taxable market; or maybe also: b) the lack of a realistic argument for a sustained bond bull market in which lower coupon bonds should be bought to rally," he said.
In the primary market Tuesday, Morgan Stanley priced for Kentucky Public Energy Authority (A1///) $749.92 million of gas supply revenue refunding bonds, Series 2025C, with 5s of 11/2026 at 3.44%, 5s of 5/2030 at 3.62%, 5s of 11/2030 at 3.63%, 5s of 5/2035 at 4.15%, 5s of 11/2035 at 4.20% and 5s of 5/2036 at 4.32%, callable 2/1/2036.
Jefferies priced for the Ohio State University (Aa1/AA+/AA+/) $559.7 million of general receipts refunding bonds (Multiyear Debt Issuance Program III), Series 2026A, with 5s of 6/2035 at 2.94%, noncall.
Jefferies priced for Cypress-Fairbanks Independent School District, Texas, (Aaa/AAA/) $279.425 million of PSF-insured unlimited tax refunding bonds, Series 2026, with 5s of 2/2026 at 2.55%, 5s of 2030 at 2.60%, 5s of 2035 at 2.92%, 5s of 2040 at 3.58% and 5s of 2041 at 3.72%, noncall.
CUSIP requests fall
In November, the aggregate total of identifier requests for new municipal securities — including municipal bonds, long-term and short-term notes, and commercial paper — fell 12.5% versus October totals.
On a year-over-year basis, overall municipal volumes were up 14.9% through the end of November.
Texas led state-level municipal request volume with a total of 169 new CUSIP requests in November, followed by California (83) and New York (78).
For the specific category of municipal bonds, there was a small drop of 5.5% month-over-month, but these requests are still up 14.9% year-over-year.
AAA scales
MMD's scale was unchanged: 2.48% in 2026 and 2.43% in 2027. The five-year was 2.43%, the 10-year was 2.76% and the 30-year was 4.24% at 3 p.m.
The ICE AAA yield curve was bumped up to one basis point: 2.46% (unch) in 2026 and 2.44% (unch) in 2027. The five-year was at 2.39% (unch), the 10-year was at 2.78% (-1) and the 30-year was at 4.18% (-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 2.76% and the 30-year yield was at 4.22% at 3 p.m.
Bloomberg BVAL was unchanged: 2.49% in 2025 and 2.44% in 2026. The five-year at 2.38%, the 10-year at 2.72% and the 30-year at 4.13% at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 3.478% (-3), the three-year was at 3.521% (-3), the five-year at 3.692% (-3), the 10-year at 4.148% (-3), the 20-year at 4.774% (-3) and the 30-year at 4.82% (-3) near the close.
Nonfarm payrolls
Those hoping the employment report would offer some clarity into the labor market were disappointed as analysts discounted the report as it may be skewed by the government shutdown.
While the Bureau of Labor Statistics warned the data may be "less reliable than usual," FHN Financial Chief Economist Chris Low noted, "the unemployment rate has been rising for months and — given the uncertainty runs both ways — the disclaimer is no reason for complacency."
Since May, employment has been trending weaker and wage growth has seen a "sharp slowdown" since mid-year, he said. "The case for rate cuts is as strong as ever despite three rate cuts since August."
Chris Zaccarelli, chief investment officer for Northlight Asset Management, agreed the weak labor report, along with better-than-expected retail sales, "will only increase the internal debate."
The labor risks outweigh inflation risks, he said, so "the Fed should continue to cut rates." However, Zaccarelli added, "the reluctance with which the Fed cut last week (as evidenced by the dot plot and forward-looking projections), it remains to be seen how attentive they are to the labor market versus the fact that inflation has remained stubbornly above their 2% target."
In normal times, the bad report would be good for the market, he said. "If the Fed is forced to cut rates more aggressively next year because we are headed into a recession, the stock market will drop."
But the Fed will likely discount this "report given data disruptions," said Kay Haigh, global co-head of fixed income and liquidity solutions for Goldman Sachs Asset Management.
Fed "Chair (Jerome) Powell commented last week that the report would likely be affected by shutdown-related distortions, making it a less reliable gauge of the labor market's health than usual," Haigh added, noting the December employment report, which will be released before the Fed meets again, will carry more weight.
The report "set a modestly dovish tone for U.S. monetary policy in 2026," said Jeff Schulze, head of economic and market strategy at ClearBridge Investments. "Although overall job creation was strongly negative at 105,000 in October due to federal government separations (DOGE), private payroll creation was buoyant over the past two months, providing a cleaner and more positive read on the path of the labor market going forward."
And while caution was noted about the reliability of the data, he said, "the rise in the unemployment rate is something to keep an eye on and will keep the hopes of another cut alive in the first quarter since labor slack appears to be gradually building."
In addition to the shutdown-related "distortions … tighter immigration policies mean the headline November payroll figure should not be taken at face value — the labor market is not as weak as those numbers might initially suggest," said Seema Shah, chief global strategist at Principal Asset Management. "That said, the larger-than-expected rise in the unemployment rate will still trigger some creeping concern within the Fed."
While the labor market cooling is likely not sharp, she said, it is sufficient "to warrant some additional monetary easing and, at the very least, a move toward neutral policy rates."
And while the Fed may want further signals of economic weakness before cutting again, Shah expects more than one cut in 2026.
While job growth is trending lower, Adam Hetts, global head of multi-asset and portfolio manager at Janus Henderson Investors, said it doesn't suggest new recession risks.
"This print alone shouldn't meaningfully shift expectations for the path of Fed cuts, nor is it low enough to create new downward pressure on risk assets," he said.
Fitch Ratings Chief Economist Brian Coulton said this report won't "resolve current debates about the health of the labor market, given the combination of solid payroll gains of 64,000 in November and a further rise in the unemployment rate to 4.6%. But allied with other indicators such as jobless claims and job openings, the labor market is certainly not falling over."
"The job market is undergoing a transformation," said Jeffrey Roach, chief economist at LPL Financial. "Wages are slowing and will make consumer income become a dominant theme in the new year."
"The fragilities in the labor market" will justify further rate cuts in 2026, he said.
Seasonal hiring disappointed this year, according to Comerica Bank Chief Economist Bill Adams. "Fewer jobs than usual (were) added in leisure and hospitality, retail, wholesale, and transportation and warehousing."
This weakness in seasonal jobs "shows up as net losses in the reported numbers," he said.
The Fed will be pressured to reduce rates in January, Adams said. "Hiring momentum has weakened in recent months, and the Fed will want to arrest this deterioration and help labor demand regain traction."
But Jamie Cox, managing partner for Harris Financial Group, said the numbers are "further evidence that the Federal Reserve is behind the curve and will need to reduce rates again in January. Try as they might to sell the purchase of short-term Treasuries as not quantitative easing, it clearly was and needed to be."
Primary to come
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Wednesday $2 billion of future tax-secured subordinate refunding bonds, consisting of $500 million of tax-exempt Fiscal 2026 Series C bonds, $1.312 billion of tax-exempt Fiscal 2026 Series D-1 bonds, $167.42 million of taxable Fiscal 2026 Series D-2 bonds, and $20.67 million of tax-exempt Fiscal 2026 Series E bonds. Jefferies.
The Black Belt Energy Gas District is set to price $800 million of gas project revenue bonds, 2025 Series F. J.P. Morgan.
The North Carolina Medical Care Commission (//BBB+/) is set to price Wednesday $313.5 million of retirement facilities first mortgage revenue bonds (Deerfield Episcopal Retirement Community Project), Series 2026, consisting of $153.435 million of Series 2026A, $16.85 million of Series 2026B-1, $25.3 million of Series 2026B-2, $33.7 million of Series 2026B-3 and $84.25 million of Series 2026B-4. Ziegler.
The Glendale Community College District, California, (Aa2/AA-//) is set to price Wednesday $200 million of GO bonds, 2024 Election, 2025 Series A. RBC Capital Markets.
The Metropolitan Water District of Southern California (/AAA/AA+/) is set to price Wednesday $184.225 million of special variable rate water revenue refunding bonds, 2025 Series B. PNC Capital Markets.
The EHOVE Joint Vocational School District, Ohio, (/AA//) is set to price Wednesday $150 million of GO School Improvement bonds, Series 2026. Piper Sandler.
Gary Siegel contributed to this report.
