Munis saw front-end weakness and strength out long, as U.S. Treasury yields fell and equities ended down after two regional banks — Zions Bancorp and Western Alliance Bancorp — reported issues with loans that involved alleged fraud.
Earlier Thursday, the market was "chugging along, doing OK, just kind of nothing, in between slight strength to modest upticks, but the narrative changed when that bank news came out. The market really ran pretty quickly," said Chris Brigati, managing director and CIO at SWBC.
Treasuries broke through 4% for the 10-year, which has been a "huge support area" for the market, he noted.
Overall, munis are continuing what's happening with USTs and experiencing strength in the rates market, Brigati said.
The two-year muni-UST ratio Thursday was at 69%, the five-year at 66%, the 10-year at 70% and the 30-year at 90%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 66%, the five-year at 64%, the 10-year at 69% and the 30-year at 89% at a 4 p.m. read.
October is usually a challenging month for the muni market, as issuance surges and reinvestment capital dips, said PIMCO strategists.
"Over the next couple of months, a blend of technical dynamics — such as refunding activity, and calendar-driven supply — along with broader rate volatility, could produce a choppy market," they said.
Despite this being a near-term headwind, it can offer an "attractive entry point for opportunistic capital allocators as cash yields are expected to ease gradually, and as issuance is likely to slow meaningfully toward year-end and into 2026," PIMCO strategists said.
The tax-exempt universe remains "exceptionally attractive" on both an absolute and relative basis, they said.
Additionally, there's value on the long-end of the muni curve, said Cooper Howard, a fixed income strategist at Charles Schwab.
Relative to USTs, longer-term munis — where yields are likely to remain range-bound — are more attractive than shorter-terms, he said.
Valuations on the front-end of the curve are historically low, mostly because of high demand from separately managed accounts, Howard said.
Elsewhere, "credit conditions continue to be broadly positive, revenues have shown resilience across issuers, and rainy-day funds sit near 20-year highs, providing a meaningful fiscal cushion," PIMCO strategists said.
Moreover, high absolute yields should help anchor future returns, and any rate cuts by the Federal Reserve — which will likely shift retail investors to long-duration — could further bolster demand for muni funds, they said.
"The combination of elevated starting yields, significant spread versus taxable fixed income, and robust credit conditions sets the asset class up for attractive forward-looking returns, both on an absolute basis and relative to other fixed income investments, over the secular horizon," PIMCO said.
Currently, munis are seeing gains month- and year-to-date of 0.80% and 3.46%, respectively, and longer-duration munis outperformed shorter-term.
The positive returns come on the heels of the best month for the index in almost two years, Howard said.
Elevated issuance contributed to weak returns at the start of the year, he said, noting that as issuance moderates over the next few months, it will be supportive of total returns.
However, issuance will remain elevated next week, as there are already five billion-dollar-plus deals on the calendar: CPS Energy with $1.8 billion of electric and gas systems revenue refunding bonds, Texas with $1.771 billion of GO mobility fund and refunding bonds, the New Jersey Transportation Trust Fund with $1.5 billion of transportation program bonds, the New York City Transitional Authority with $1.5 billion of future tax secured bonds and the Kentucky State Property and Building Commission with $1.2 billion of revenue and revenue refunding bonds, according to CreditSights.
In the primary market Thursday, BofA Securities preliminarily priced for CommonSpirit Health (A3/A-/A-/) an upsized $2.7 billion of taxable corporate CUSIPs, Series 2025A. Pricing details were unavailable as of 3:30 p.m.
BofA Securities priced for Washington Health Care Facilities Authority (A3/A-/A-/) on behalf of CommonSpirit Health $518.76 million of revenue bonds, Series 2025A, with 5s of 9/2026 at 3.11%, 5s of 2030 at 3.03%, 5s of 2035 at 3.51%, 5s of 2040 at 4.02%, 5s of 2045 at 4.50%, 5.25s of 2050 at 4.71% and 5.5s of 2055 at 4.71%, callable 9/1/2035.
BofA Securities priced for the Colorado Health Facilities Authority (A3/A-/A-/) on behalf of CommonSpirit Health $455.33 million of revenue bonds, Series 2025A, with 5s of 9/2029 at 3.00% and 5s of 2035 at 3.47%, noncall.
Fund flows
Investors added $678.1 million to municipal bond mutual funds in the week ended Wednesday, following $882 million of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $15.1 million compared to inflows of $268.5 million the previous week.
Tax-exempt municipal money market funds saw inflows of $474 million for the week ending Oct. 14, bringing total assets to $140.591 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds fell to 2.29%.
Taxable money-fund assets saw $20.799 billion pulled, bringing the total to $7.182 trillion.
The average seven-day simple yield was at 3.78%.
The SIFMA Swap Index was at 2.31% on Wednesday compared to the previous week's 2.70%.
AAA scales
MMD's scale saw cuts on the front end and bumps outside of five years: 2.45% (+5) in 2026 and 2.35% (+2) in 2027. The five-year was 2.34% (unch), the 10-year was 2.78% (-4) and the 30-year was 4.13% (-3) at 3 p.m.
The ICE AAA yield curve was bumped up to five basis points: 2.43% (unch) in 2026 and 2.33% (unch) in 2027. The five-year was at 2.34% (-1), the 10-year was at 2.78% (-3) and the 30-year was at 4.10% (-2) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped three basis points six years and out: The one-year was at 2.44% (+4) in 2025 and 2.36% (+4) in 2026. The five-year was at 2.33% (unch), the 10-year was at 2.79% (-3) and the 30-year yield was at 4.12% (-3) at 3 p.m.
Bloomberg BVAL saw cuts on the front end and bumped out long: 2.39% (+5) in 2025 and 2.35% (+4) in 2026. The five-year at 2.25% (unch), the 10-year at 2.77% (-3) and the 30-year at 4.08% (-3) at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 3.423% (-8), the three-year was at 3.429% (-7), the five-year at 3.551% (-7), the 10-year at 3.975% (-5), the 20-year at 4.551% (-4) and the 30-year at 4.582% (-4) near the close.
