Muni yields followed U.S. Treasury yields higher Friday as bond markets grappled with concerns over inflation and the Federal Reserve's next move.
Muni yields were cut four to 10 basis points, depending on the scale, while UST yields rose up to 14 basis points.
"The rates market is pricing in a world where the Federal Reserve is completely boxed in; rising inflation with no good exit. Not a comfortable place to be," said James Pruskowski, managing director at Hennion & Walsh.
Rate hikes appear to be more realistic following this week's hotter-than-expected consumer price index and producer price index data, along with the broader impacts of the oil-driven supply shocks on inflation, Kevin McGuigan, director at Municipal Market Analytics.
"The CPI and PPI data this week were higher than expected, and that's just kind of bled into the inflation fears of many market participants [Friday] morning," said Chris Brigati, managing director and CIO at SWBC.
"This started [Thursday] afternoon, and in terms of the market kind of selling off, it looked OK for most of the day, and then it just gradually bled down throughout the afternoon, and then once overnight trading picked up for the Treasury market futures, the decline continued, and that's just fed into municipals," he said.
USTs are trying to "digest the economic views from this week, what's going on geopolitically, what's going on in Iran and China," said Dora Lee, director of research and partner at Belle Haven.
Munis, though, may not have caught up with the UST action yet, so there may be more weakness in the muni market next week, she noted.
President Donald Trump's summit with Chinese leader Xi Jinping ended after two days, during which several key issues were addressed, including Trump's contemplation of lifting sanctions on Chinese companies that purchase Iranian oil.
However, "we left the China meeting with no sort of decision and inclusion on any sort of team approach to straighten out the Strait of Hormuz," said James Welch, a municipal portfolio manager at Principal Asset Management, though both sides agreed the strait needs to stay open.
Currently, the Iran war "isn't just a geopolitical story anymore; it's an inflation tax on every American and rates are reflecting that today," Pruskowski said.
As the war with Iran drags on, people are becoming more skeptical that it may last longer than they hoped, McGuigan said.
"Markets were giving some leeway and maintaining some optimism that a deal would be reached, but as it stretched longer and longer, you could see oil prices continue to creep higher, and it continued to impact bond yields more," he said.
In spite of this, the muni market is in pretty good shape; it's just the macro story that's driving the rates story, Welch said.
"Flows are positive, supply remains elevated, but the markets are in a much different state performance-wise," he noted.
Munis are the best in fixed income compared to the start of the year, when the asset class was the worst in fixed income, Welch said.
"It's been a complete reshuffling of the debt as it relates to the market again. If you like income and you're a yield buyer, munis are a really good place to be," he said.
Primary to come
Issuance remains robust the week of May 18 at an estimated $11.821 billion, with $9.627 billion of negotiated deals on tap and $2.194 billion of competitives.
PEFA leads the negotiated calendar with $915 million of gas project revenue bonds, followed by the Philadelphia School District with $797.49 million of GOs.
The competitive calendar is led by the Missouri Highways and Transportation Commission with $609.035 million of third lien state road bonds.
