Municipals were a touch firmer Thursday, U.S. Treasuries were better and equities closed with another record for the Dow and S&P 500, but NASDAQ saw losses, as investors and analysts continued to speculate on what's in store for macroeconomic policy in 2026 and weighed the implications of the AI trade.
Municipals underperformed gains in U.S. Treasuries and ratios rose slightly on the day's moves.
The two-year muni-UST ratio Thursday was at 69%, the five-year at 65%, 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 68%, the five-year at 64%, the 10-year at 67% and the 30-year at 87% at a 4 p.m. read.
Municipal bond mutual fund inflows slowed significantly as LSEG Lipper reported $16.0 million of inflows into municipal bond mutual funds for the week ending Wednesday after inflows of $736.6 million the week prior. High-yield funds saw outflows of $64.5 million compared to inflows of $252.5 million the week before.
In the primary market, J.P. Morgan Securities priced and repriced with bumps of up to 11 basis points from the preliminary pricing of $730 million of special obligation revenue bonds for the
Bond Buyer 30-day visible supply falls to $8.29 billion as the primary begins to slow down ahead of the holidays.
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% (unch) at 3 p.m.
The ICE AAA yield curve was bumped: 2.46% (-2) in 2026 and 2.43% (-2) in 2027. The five-year was at 2.39% (-2), the 10-year was at 2.78% (-2) and the 30-year was at 4.19% (unch) 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 4.20% at 4 p.m.
Bloomberg BVAL was unchanged 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 4.11% (-1) at 4 p.m.
FOMC redux
Analysts continued parsing Federal Reserve Chair Jerome Powell's words and market reaction to the Federal Open Market Committee meeting, speculating about more cuts than projected, especially with a new chair expected, and offering key takes.
"We're not surprised to see near-term optimism in the markets given that the Fed continues to cut rates even though the economy is growing," said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
"However, we think the rose-colored glasses may come off once investors realize that the path to lower interest rates may take longer — or may not materialize at all — to the extent that they believe it will," he said.
Powell "likely realizes that his effective leadership may end much sooner than his actual term ends (e.g. January vs May)," Zaccarelli said, "so he made sure to reemphasize all of the points that were important to him: the Fed wants to operate policy to help all Americans, that they are data-dependent and that given the limited amount of government data (because of the shutdown) and private sector information currently available, the risks to unemployment outweigh the risks to price stability."
"With its third straight rate cut, the Fed is sending a clear message: it's no longer just watching inflation — it's managing risk," said Gina Bolvin, president of Bolvin Wealth Management Group.
The Fed appears concerned "about the economy's underlying momentum," she said. "While inflation has cooled, the Fed is also acknowledging that policy lags, geopolitical uncertainty and tighter credit conditions are weighing more heavily on the outlook."
While the panel is divided, Chair Jerome "Powell's tone suggests a bias toward further easing if needed," Bolvin said.
"This is a Fed trying to guide the economy to a soft landing without oversteering," she added. "For investors, that means expect a more flexible, data-reactive central bank heading into 2026."
But the key takeaway, according to Jack McIntyre, portfolio manager at Brandywine Global, was Powell's statement "that Fed policy rates are now in the range of neutral. Neutral has been their goal for this part of the monetary policy cycle, which means the bar for further rate cuts has moved higher."
The higher bar was also verified by the dissents against the rate cut, he said. "Remember, the Fed is running easier monetary policy at a time when inflation is stuck above its target rate, and the government continues to maintain very stimulative fiscal policy with budget deficits expected to continue at around 6% for the foreseeable future," McIntyre said.
Tax changes and refunds next year will spur consumer spending, he added, "which is another reason the Fed should be on hold. A pause would allow time for official economic data to catch up and become less influenced by the recent government shutdown."
"There is no risk-free path for monetary policy, but it seems the committee is banking on higher productivity, implying stronger growth despite softer job creation," said Jeffrey Roach, chief economist for LPL Financial. "Projections with stronger growth and lower unemployment suggest the Fed will remain committed to bringing inflation down."
The Fed will hold through the first quarter of 2026, he said, "especially if the economy responds to the tailwinds from fiscal and policy support."
Still Fed guidance this time "probably tells us less than usual about the interest rate outlook, for two big reasons," said Comerica Bank Chief Economist Bill Adams.
"First, they know less than usual about the current state of the economy because the shutdown delayed the release of economic statistics," he said. "Second, the Fed's guidance doesn't account for how its approach will change after Chair Powell's term ends in May."
Adams said it's more likely the Fed will cut rates more times next year.
"The Fed delivered a rate cut for the doves despite arguments advising against such a move," said Charlie Ripley, senior investment strategist for Allianz Investment Management. "With two strong dissenters against the move, the current backdrop highlights how difficult the decision to cut rates really is."
While labor market softness propelled the rate cut, he said, "one could argue that most of the shifts in the labor market are structural and are of no benefit from a policy cut."
And inflation is slowly rising, Ripley noted, with "ample arguments that point to the risk of rising inflation next year."
This puts the Fed in a difficult position, he said.
"This could very well be the final rate cut that Chairman Powell delivers, and while we have not gotten back to neutral from a rate perspective, one could argue that the progress on inflation has been measurable," Ripley said.
Neil Sun, BlueBay portfolio manager at RBC Global Asset Management, expects one or two rate reductions next year. "But stronger growth and persistent inflation could challenge this view," he said.
"Our base case remains that the current easing cycle is not over yet but rather that it is entering a slower phase," said Wells Fargo senior economists Sarah House and Michael Pugliese. "While the labor market is far from collapsing, the softening in conditions to the wrong side of maximum employment supports policy returning to a more neutral position."
Inflation should wane in 2026 as the impact of tariffs "fade, which would reduce the tension between the FOMC's employment and inflation mandate."
They expect 25 bps rate cuts at the March and June meetings, dependent on inflation and employment data.
"With just one cut penciled in for 2026 and one for 2027, the Fed is threading the needle between risk management and not completely ignoring inflation," said Christian Hoffmann, head of fixed income at Thornburg Investment Management.
"We'll look for insights into the current state of the economy and any updates to the Fed's reaction function," he said.
And as the end of his term approaches, Hoffmann said, "Powell's signals matter for now, but the market narrative is already shifting."
It will take time before the Fed cuts again, said Jay Woods, chief market strategist at Freedom Capital Markets. "Seeing the Jerome Powell era will have three more meetings, and the most vocal member of the chorus to cut in Steven Miran is leaving, the odds of a cut given the dot plot and initial commentary seem highly unlikely."
The SEP "added another layer of nuance," according to Siebert Financial CIO Mark Malek. "While the median projected fed funds rate for December 2026 was unchanged, the dispersion of dots tells a different story. Several previously dovish projections moved higher and closer to the median, producing a more hawkish clustering beneath what appears, at first glance, to be a static outlook."
The Fed needs to maintaining "inflation-fighting credibility while easing policy just enough to support a clearly weakening labor backdrop," he said. "For now, the Fed can afford to kick the can down the road through the data blackout period and hope incoming numbers ahead of January's meeting validate its cautious stance."
The Fed offered a clear message, said Daniel Siluk, portfolio manager and head of global short duration and liquidity at Janus Henderson Investors: "The era of preemptive easing is over."
Muni market in the middle
The "data vacuum" because of the recent federal shutdown only "intensified our signal hunt," said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.
Key official releases, including the November nonfarm payrolls report and new inflation readings, are now scheduled for mid-December, he noted.
"In their absence, the Fed is looking at the same patchwork we are seeing," Kozlik said.
"The picture the available data paints is not of an economy in crisis, but of one that is decelerating unevenly, with risks tilting more toward the labor side of the Fed's dual mandate than at any time since the cutting cycle began," he said.
This backdrop is "oddly constructive" for muni investors, Kozlik said.
The Federal Reserve cut rates 25 basis points at the conclusion of its meeting on Wednesday, as expected.
Prior to this, odds of a December cut had "surged," and that expectations of lower rates typically pull more buyers into the tax-exempt market, Kozlik said.
Yields continue to be attractive, having been "range-bound" since mid-October, he said.
"But, this may not be the case after Powell's guidance Wednesday, or the market reaction in coming days and weeks," he said.
However, next year, yields should remain attractive, especially when factoring in taxes, said Cooper Howard, a fixed-income strategist at Charles Schwab.
Short-term yields are expected to move lower, while longer-term yields will likely remain elevated, he said.
For now, the "constructive dynamic" remains, Kozlik said.
Robust issuance over the past two months — even though October saw supply decrease year-over-year — has "left dealers with ample inventory, and secondary spreads have remained orderly even as Treasury volatility picked up," he said.
As the possibility of a rate cut firmed, signs that buyers are willing to "activate" again exist, and the market's appetite for high-quality, long-duration income continues to rebuild, Kozlik said.
In 2026, performance will depend on demand, Howard said.
Most muni shops estimate issuance next year will be another record year of supply, with firms expecting volume to reach at least $600 billion.
If demand doesn't keep pace, muni total returns may lag, Howard said,
Additionally, credit quality should remain stable next year, he said.
Growth in tax revenues jumped in 2021 and 2022 but has since returned to their longer-term average, Howard said.
The increase in tax revenues was used by many states to build up their liquidity positions, which will help offset an economic slowdown if one happens, he said.
Gary Siegel contributed to this report.
