Municipals were steady, underperforming a U.S. Treasury rally after an inflation print suggested the Federal Reserve may be able to cut rates this year. Equities ended down.
The two-year muni-UST ratio Wednesday was at 68%, the five-year at 69%, the 10-year at 76% and the 30-year at 93%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 66%, the five-year at 68%, the 10-year at 73% and the 30-year at 92% at 4 p.m.
The Investment Company Institute Wednesday reported $163 million of inflows for the week ending June 4, following $1.428 billion of inflows the previous week.
Exchange-traded funds saw outflows of $13 million after $379 million of inflows the week prior, per ICI data.
The consumer price index report, on one hand, is "reassuring," said JB Golden, executive director and a portfolio manager at Advisors Asset Management. "There's obviously been a lot of concern about tariffs and trading so [inflation] moderating slightly is certainly a relief to the market," he said.
CPI is why the UST market is rallying a bit, along with "the market's feeling pretty well fairly priced where we're at, even though we haven't vanquished inflation yet," Golden said.
A "lighter-than-anticipated CPI report" led to UST firmness, as it "quelled fears about tariff-related inflation and boosted enthusiasm that the Fed will cut rates in the next two or three meetings," said José Torres, senior economist at Interactive Brokers. "Bulls are also energized by a de-escalation in trade tensions between Washington and Beijing."
These developments have "economists dialing growth projections north while adjusting price pressure expectations south," he added.
"Furthermore, the yield curve is shifting in bull-flattening motion led lower by the short-end, as robust GDP forecasts contain duration ahead of auctions today and tomorrow, amounting to $61 billion worth of 10- and 30-year government debt," Torres said. "Optimism will likely be bolstered if the offerings see satisfactory demand, like yesterday's showing for 3-year notes."
Munis largely ignore UST movements following the CPI print. Overall, the asset class is in a "pretty good place" because technicals appear to be aligning to demand a little bit more in line with supply, Golden said.
"You also have valuations, whether you look at relative valuations versus corporates or you just look at absolute yields out, it's been a very long time, notwithstanding some periods after COVID, where you've been able to get 4%, 4.5% absolute yields on munis," he said.
There has also been the "swing in reinvestment demand that's finally starting to aid us a little bit with the record-setting supply that we've seen," Golden said.
"This year's first half leap in primary market volume has been a function of upside risks, including a pull forward of issuance in advance of potential policy limiting the authorization to issue tax-exempts in certain sectors of the market, pent up need for capital, and the cumulative impact of inflation on funding needs across the market," said J.P. Morgan strategists led by Peter DeGroot.
This influx of issuance over the past several months led J.P. Morgan to revise its 2025 issuance projection upward to $560 billion from $490 billion.
The surge in supply has been driving the underperformance, Golden said, "and know that we've hit this period in May where if you strip out AMT and taxable issuance, tax-exempt was not up all that much in May."
Tax-exempt issuance rose 9.2% to $44.787 billion in May, according to LSEG, and the market was able to digest it "really well," he said.
That, though, for the first time this year [drove] the relative outperformance versus USTs and that'll continue through the summer months, Golden said.
In the primary market Wednesday, RBC Capital Markets preliminarily priced for Private Colleges and Universities Authority (Aa2/AA//) $864.61 million of Emory University revenue bonds, Series 2025A, with 5s of 9/2029 at 3.07%, 5s of 2036 at 3.86%, 5.25s of 2040 at 4.25% and 5.25s of 2045 at 4.70%, callable 9/1/2035.
BofA Securities priced for the Pennsylvania State University (Aa1/AA//) $517.33 million of tax-exempt Series A bonds, with 5s of 9/2026 at 2.77%, 5s of 2030 at 2.93%, 5s of 2035 at 3.53%, 5s of 2040 at 4.14%, 5s of 2045 at 4.55%, 5.25s of 2050 at 4.72% and 5.5s of 2055 at 4.70%, callable 9/1/2035.
J.P. Morgan priced for the Southern California Metropolitan Water District (Aa1/AAA//) $131.29 million of water revenue refunding bonds, 2025 Series A, with 5s of 4/2031 at 2.60%, 5s of 2035 at 3.11% and 5s of 2038 at 3.64%, callable 4/1/2035.
In the competitive market,
The state also sold $414.805 million of state and local facilities loan GOs of 2025, First Series A, Bidding Group 2, to BofA Securities, 5s of 6/2036 at 3.60% and 5s of 2040 at 4.05%, callable 6/1/2035.
Details about Maryland's planned sale of $366.915 million of state and local facilities loan GO refunding bonds of 2025, First Series B, Bidding Group 1; and $294.735 million of GO refunding bonds, of state and local facilities loan GOs refunding bonds of 2025, First Series B, Bidding Group 2, were unavailable as of 3:30 p.m.
AAA scales
MMD's scale was unchanged: The one-year was at 2.72% and 2.70% in two years. The five-year was at 2.79%, the 10-year at 3.34% and the 30-year at 4.56% at 3 p.m.
The ICE AAA yield curve was little changed: 2.73% (unch) in 2026 and 2.65% (unch) in 2027. The five-year was at 2.77% (unch), the 10-year was at 3.25% (-1) and the 30-year was at 4.52% (-1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.73% in 2025 and 2.71% in 2026. The five-year was at 2.79%, the 10-year was at 3.34% and the 30-year yield was at 4.56% at 4 p.m.
Bloomberg BVAL was unchanged: 2.71% in 2025 and 2.73% in 2026. The five-year at 2.83%, the 10-year at 3.30% and the 30-year at 4.52% at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 3.942% (-8), the three-year was at 3.904% (-9), the five-year at 4.009% (-8), the 10-year at 4.411% (-6), the 20-year at 4.922% (-4) and the 30-year at 4.908% (-2) near the close.
CPI
The softer-than-expected inflation data is too little to push the Federal Open Market Committee to cut rates at its meeting next week but opens the door for a cut in July or September, should data allow, analysts said.
"Weaker economic growth and slower inflation should encourage the resumption of the Fed rate-cutting cycle," said Tony Welch, CIO of SignatureFD. "While they are not likely to cut next week, July or September could be live meetings."
BMO Chief U.S. Economist Scott Anderson agreed. "The Federal Reserve will take some solace from the improving consumer inflation trends, but not enough, in our view, to pull the trigger on another rate cut until September at the earliest."
Some lower prices, specifically energy, "may yet prove fleeting," he said. "Tariffs remain a threat to higher inflation in the months ahead — even with the tariff truce between the U.S. and China and the benign readings on inflation in recent months."
But the Fed is likely to need more information before cutting rates, according to John Lloyd, lead of multi-sector credit strategies and portfolio manager at Janus Henderson Investors.
"We still believe the Fed will need to see the full inflation impacts of trade policy and that market inflation expectations remain well-grounded before they react, especially since the economic hard data, including the employment data, remains strong," he said. This report offers "the Fed with comfort that we are on the correct pathway with regards to underlying inflation."
He believes the Fed will cut "at least" twice this year.
Cooling in the jobs market "will help to mitigate the tariff impact," said ING Chief International Economist James Knightley. "We still see an excellent chance of inflation getting down to 2% in late 2026, and that keeps the door wide open to Fed rate cuts late in 2025."
Despite the lower inflation gains, FHN Financial macro strategist Will Compernolle said, "There are still reasons to think tariffs will show up gradually over the next few months."
Consumers front-ran tariffs, and as "inventories dwindle, businesses can no longer punt on their decision to either accept lower profit margins or raise consumer prices," he said.
"The Fed needs to seriously consider how long they are going to wait before they have gotten clarity on the overall inflation impacts of trade policy," Compernolle said. "[Fed] Chair [Jerome] Powell should field questions next week about how the Fed views these benign inflation reports in the face of higher trade levies."
The report's "softer trends in shelter inflation" provides "solace" for the Fed, said Jeff Schulze, head of economic and market strategy at ClearBridge Investments. But with tariff uncertainty, "the Fed is unlikely to move away from its 'wait and see' messaging at next week's meeting. The doves will welcome today's release, which keeps the door wide open for rate cuts later in the year, a positive for risk assets."
Despite this downside miss and labor resilience, "the environment remains complex, "said Daniela Sabin Hathorn, senior market analyst at Capital.com. This data, "alongside subtle cracks in the labor market," could justify a cut if the Fed were so inclined, she said.
Further labor market resilience could delay rate cuts "potentially dampening risk appetite in the near term," Hathorn said.
The lower-than-forecast read "is reassuring — but only to an extent," said Seema Shah, chief global strategist at Principal Asset Management. Tariff fallout might not be seen in CPI data for several months, "so it is far too premature to assume that the price shock will not materialize."
The uncertainty will result in the Fed waiting "a bit longer before it makes any policy move," she said.
While inflation has been relatively soft for the past three months, "our view remains that the Fed will need to see weaker labor market data in order to resume rate cuts," said Brian Rose, senior U.S. economist at UBS Global Wealth Management. "Our base case calls for 100 basis points of cuts starting in September, but this could be delayed if payroll growth remains solid at the same time that tariffs are pushing up inflation."
Primary to come
The Metropolitan Government of Nashville and Davidson County (Aa2/AA//AA/) is set to price Thursday $451.895 million of water and sewer revenue refunding and improvement bonds. BofA Securities.
The Massachusetts Development Finance Agency (/A//) is set to price Thursday $179.03 million of Tufts University student housing project revenue bonds. Barclays.
