Front-end munis were under pressure Thursday as the short end faced a correction, while munis five years and out richened. U.S. Treasury yields fell and equities ended up.
Muni yields were cut up to 10 basis points three years and in, while longer yields were bumped one to four basis points. UST yields fell by seven to nine basis points.
Several high-grade names on the front end traded at significant concessions Thursday:
Maryland general obligation bonds 5s of 3/2027 at 3.001% (+23bps). Florida Board of Education PECO 5s of 6/2027 sold at 2.87% (+10bps). Loudoun County, Virginia, GO 5s of 12/2027 at 2.896% (+13bps).
Florida BOE PECO 5s of 6/2028 at 2.95% (+8bps). Ohio Water 5s of 12/2028 at 2.98% (+9bps). Maryland GO 5s of 8/2028 sold at 2.98% (+10bps).
The front-end weakness aligns with the jump in the two-year UST post-Fed on a ratio basis and catching up to floaters trading much higher this week, said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital
Dailies are up 36bp (setting Thursday at 3.43%) and weeklies are up 56bp (Thursday at 3.26%) from Sept. 10, she noted.
The front-end cheapening follows Wednesday's bear flattening of the UST curve in response to the Federal Reserve hiking rates and a median 2026 dot that implied another hike before yearend, said Kevin McGuigan, director at Municipal Market Analytics.
"It may seem surprising that municipals are still experiencing a front-end correction despite Treasuries retracing much of yesterday's move today," but the muni curve is still significantly steeper than the UST curve, he said.
The municipal 2/10 spread is at 87 basis points versus 26 basis points for USTs, McGuigan said.
"Increased expectations for higher-for-longer front-end rates, combined with greater confidence that tighter monetary policy will contain longer-term inflation pressures, are likely being reflected in the municipal yield curve [Thursday], contributing to its flattening," he said.
Fund flows
Investors pulled $1.814 billion from municipal bond mutual funds in the week ended Wednesday, following $206.4 million of inflows the prior week, according to LSEG Lipper data. This breaks a 21-week inflow streak.
High-yield funds saw outflows of $583.6 million compared to outflows of $166.2 million the previous week.
New-issue market
In the primary market Thursday, Jefferies priced for the California Infrastructure and Economic Development Bank (Aaa/AAA//) $255.475 million of refunding revenue bonds (The J. Paul Getty Trust), Series 2026A, with 5s of 10/2029 at 2.94%, callable 7/1/2029.
In the competitive market, New York State (Aa1/AA+/AA+/AA+/) sold $259.415 million of tax-exempt sustainability GOs, Series 2026A, to BofA Securities, with 5s of 9/2032 at 3.14%, 5s of 2036 at 3.60%, 5s of 2041 at 4.18% and 5s of 2046 at 4.52%, callable 9/15/2036.
The state also sold $59.46 million of taxable sustainability GOs, Series 2026B, to Wells Fargo, with all bonds priced at par: 4.585s of 9/2027, 4.9s of 2031 and 4.97s of 2032, noncall.
