The Treasury Department's decision to increase the size of longer-dated bond buybacks to at least $4 billion per operation next month is expected to have little impact on the muni market beyond the strength seen on Wednesday.
The muni market saw a two-day selloff before seeing gains Wednesday, as the asset class underperformed a UST rally on the heels of the news.
The announcement — which affects the 10- to 30-year part of the curve — sent longer-term UST yields falling up to 10 basis points on Wednesday. Muni yields followed UST yields lower, though to a lesser degree, as they were bumped up to four basis points.
However, the rally fizzled out Thursday as both munis and USTs saw losses into Friday.
The buyback announcement comes after long-dated UST yields climbed to their highest levels in nearly 20 years on Monday: the 20-year UST yield rose to 5.304%, while the 30-year UST yield jumped to 5.308%.
"This increase in buyback operation sizes reflects Treasury's desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations," the Treasury Department said
There could be short-term impacts on the long end of the UST market, potentially bringing the bets people are making on the long end of the market a little bit more two-sided, said Jamie Iselin, head of the municipal fixed income team and a senior portfolio manager at Neuberger Berman.
But, in the long term, "we have had a supply-demand imbalance on the long end, and what's going to bring that down is inflation expectations moving lower or people starting to price in the Fed being in more of a rate-lowering mode as opposed to a
As for the muni market, the long end of the curve has done well this year compared to other parts of the curve, Iselin said.
Additionally, there is less supply on the long end as issuance is concentrated in the one- to 15-year part of the curve, where separately managed accounts prefer, he noted.
"Anything that can bring more stability to the longer end of the Treasury market is helpful, but I think more for munis, as long supply stays manageable on the longer end of the market, we should be decently well bid," Iselin said.
"Munis will tag along to some of the long UST reaction (up and down), but supply in our market is also a key factor," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
Large issues with heavy long-end maturities are more impactful to tax-exempt yields, she said.
Following the announcement, the market felt good for a couple of hours, then retraced most of it pretty quickly, said Chris Brigati, managing director and CIO at SWBC.
"It's not going to do much to influence the [muni] market as it is as it stands now. So if they go bigger, they decide to change the dynamic, then maybe, but I don't personally think so," he said.
Outside of the announced buybacks, Treasury Secretary Scott Bessent "told the market two things in one week; high rates are not welcome and a lot of programs given to states can be cut back," said James Pruskowski, managing director at Hennion & Walsh, noting muni investors should pay attention to both, not just the first.
"The same Treasury Secretary who blinked on long-end rates this week also reminded us that federal transfers to states are on the table," he said, in an apparent reference
While the muni tax exemption has survived every fiscal crisis in modern history, the fiscal deficit has never been this large with this much political pressure to find savings, Pruskowski said.
"The conversation is coming; the question is when," he said.
As federal officials look for revenue or budget savings, the tax exemption could become a target as it was in 2017, said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.
Reducing or eliminating the tax exemption would mean states, local governments, and public entities would face more expensive infrastructure financing, he said.
However, the tax exemption "does not face an imminent threat, but rising federal debt increases the risk that policymakers could target it in future budget negotiations," Kozlik said.
Caitlin Devitt contributed to this story.
