Munis were little changed Wednesday as U.S. Treasuries were flat and equities ended mixed after the
"Markets are reading this as a strategic pause, not a policy shift," said Gina Bolvin, president of Bolvin Wealth Management Group. "For investors, it's a reminder to stay positioned in high-quality growth, income-generating assets, and sectors that benefit from a lower-rate environment on the horizon."
The two-year muni-UST ratio Wednesday was at 61%, the five-year at 59% the 10-year at 62% and the 30-year at 88%, according to Municipal Market Data's 3 p.m. EDT read. The two-year muni-UST ratio was at 61%, the five-year at 58%, the 10-year at 63% and the 30-year at 88%, according to ICE Data Services.
The Investment Company Institute Wednesday reported inflows of $2.317 billion for the week ending Jan. 21, following $1.591 billion of outflows the previous week.
Exchange-traded funds saw inflows of $467 million after $5.58 billion of inflows the week prior, per ICI data.
Several key factors are likely to shape the muni market — which remains an "attractive option for long-term investors seeking income and potentially stable returns" this year, said Ben Barber, director of municipal bonds at Franklin Templeton, and Jennifer Johnston, director of municipal bonds research at the firm.
While munis underperformed relative to other fixed-income segments last year, the asset class delivered positive returns and remains appealing for its stability and favorable valuations, they said.
"Current absolute and relative yields may provide compelling opportunities, with valuations that cannot be found in other fixed-income sectors," Barber and Johnston said.
Issuance in 2025 hovered around a record $580 billion, and most shops expect issuance to reach "exceptional highs" this year, mainly because capital requirements for infrastructure, which cannot rely on government stimulus programs anymore, they said.
So far this year, issuance has come to market at a slower pace than at the start of 2025, with a "push-pull" dynamic, said Chad Farrington, co-head of municipal bond investment strategy at DWS.
Inflation is increasing project costs, which may increase supply, but then how much issuance was pulled forward last year because of the tax policy changes? he asked.
However, elevated supply could become a headwind to total returns if demand doesn't keep up, said Cooper Howard, director of fixed-income research and strategy at Charles Schwab.
This year, demand is expected to play a more significant role in driving market developments, Barber and Johnston said.
So far, demand has been positive, as seen by the sizable flows into muni mutual funds and exchange-traded funds, Howard said.
Demand has been strong for several reasons, he noted.
"Yields, especially when adjusted for taxes, are attractive, total returns have been positive, and there haven't been concerns over credit quality," Howard said. "If any of those three factors begin to fade, investors may begin to shy away from municipal bonds and total returns may suffer."
Elsewhere, fundamentals are causing some pressure, such as for certain school districts, Farrington said.
"With school districts, there's pressure from waning COVID relief and from federal and state government funding. However, pressure from state governments may not necessarily spill over for bond investors because you've got added protection for some school districts like [the Permanent School Fund Guarantee program] in Texas," he said.
Similar pressures may also exist for charter schools, which are cheap due to unfavorable demographics, and higher education, Farrington said.
Overall, though, "state budgets are in great shape, they're going to be fine, as well as mostly local governments," he said.
Munis are a high-quality asset class, and "you're not seeing major cracks. But you have these segments of the market that are fundamentally weakening, and then it's just a matter of how much further do they have to weaken before you get credit pressures," Farrington said.
AAA scales
MMD's scale was unchanged: 2.18% in 2027 and 2.18% in 2028. The five-year was 2.27%, the 10-year was 2.65% and the 30-year was 4.29% at 3 p.m.
The ICE AAA yield curve was narrowly mixed: 2.20% (-1) in 2027 and 2.19% (-1) in 2028. The five-year was at 2.23% (-1), the 10-year was at 2.68% (unch) and the 30-year was at 4.26% (+2) at 4 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.18% (unch) in 2027 and 2.18% (-1) in 2028. The five-year was at 2.27% (unch), the 10-year was at 2.67% (-1) and the 30-year yield was at 4.24% (unch) at 3 p.m.
Bloomberg BVAL was unchanged: 2.24% in 2027 and 2.21% in 2028. The five-year at 2.23%, the 10-year at 2.62% and the 30-year at 4.16% at 4 p.m.
Treasuries barely moved.
The two-year UST was yielding 3.582% (+1), the three-year was at 3.653% (+1), the five-year at 3.841% (+1), the 10-year at 4.25% (+1), the 20-year at 4.819% (flat) and the 30-year at 4.861% (flat) near the close.
FOMC
The Federal Open Market Committee left the fed funds target unchanged at a range of 3.50% to 3.75% at its meeting, which ended Wednesday, though two governors — Stephen Miran and Christopher Waller — wanted a quarter-point cut.
The statement termed labor as showing "some signs of stabilization," while inflation "remains somewhat elevated." The statement no longer says downside risk to labor has increased.
During his press conference, Fed Chair Jerome Powell said, "the current stance [of monetary policy] is appropriate" for the Fed to meet its dual mandate. He said he attended the Supreme Court arguments on Gov. Lisa Cook because he felt it was appropriate.
He wouldn't comment on whether he will stay on the Board once he is replaced as chair or on the subpoena regarding the renovations at the Fed building.
Rates are at the higher end of the range of neutral or slightly restrictive, he said. "We've done a lot of the process of normalizing," and much of the work is done.
"Expect the yield curve to flatten as longer maturity bonds outperform," said Jack McIntyre, portfolio manager at Brandywine Global.
He's concerned about the next chair when he sees the Fed taking "a more activist role, including pulling more levers to impact the economy and markets — not just setting policy rates."
"The Fed is likely on an extended pause with strong activity data and signs of stabilization in the labor market suggesting little need to take out further insurance," said Kay Haigh, global co-head of fixed income and liquidity solutions in Goldman Sachs Asset Management.
Goldman expects cuts later in 2026, "as a moderation in inflation allows for two further 'normalization' cuts to take rates back to levels seen by the median FOMC member as neutral."
While the pause wasn't surprising given "recent remarks from Fed officials emphasizing a more cautious tone," Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute, said, "the window of opportunity for further cuts, if truly data dependent, may be shrinking."
Still, he said, Fed cuts "will have less emphasis on the economic weakening story and more on the goal of finding neutral."
With just two dissents, Alvarado said, it appears "most of the committee is now more aligned in the wait-and-see approach."
"What's missing in all this drama is the fact that the Fed has been able to navigate the storm of rising inflation and unemployment during these volatile times," said Jay Woods, chief market strategist at Freedom Capital Markets. "Many have talked about Jerome Powell and his legacy at this, his antepenultimate meeting, but the Fed under Powell's leadership may not have landed the plane by meeting its 2% goal; it is still flying smoothly as seen with S&P hitting 7000 and new all-time highs again today."
Jeffrey Roach, chief economist at LPL Financial, said, "Given the more likely FOMC view that dual risks of inflation and unemployment are mostly in balance, we should not expect any change in policy at the March meeting."
The statement's lack of noting a shifting balance of risks "is extremely noteworthy for how we build expectations for future FOMC meetings," he said.
"The change to a neutral balance of risks and the note about signs of stabilization in the unemployment rate are related," said FHN Financial Chief Economist Chris Low. "The unemployment rate is the Fed's favorite measure of labor slack. If the rate is stable and low, they consider it to mean stable, full employment even without job growth."
Still, the Fed referred to signs of stabilization, not actual stabilization, he said, "which is why the Fed holds out the possibility of further cuts if risks reemerge."
The pause "underscores a Federal Reserve that is increasingly cautious, internally divided, and intent on preserving credibility amid extraordinary political noise," said David Miller, CIO of Catalyst Funds. "The two dissents in favor of a cut highlight growing concern that policy may already be restrictive enough as inflation cools and labor market momentum softens, even as the broader committee signals a deliberate, meeting-to-meeting approach in 2026."
Seema Shah, chief global strategist at Principal Asset Management, said "With the unemployment rate unexpectedly dropping last month, the Fed feels confident enough to remove any reference to downside risks."
But she noted, "It's too early to declare victory."
Gary Siegel contributed to this article.
