Inflation

Most on the Street expect issuance to come in around $500 billion, but a few think volume will be much higher, primarily because of potential changes to the tax exemption. Most firms expect refunding volumes to also grow in 2025.

Municipal investors are more focused on the final new-issues coming down the pike and repositioning books as 2024 heads to a close. ICI reported another week of inflows into municipal bond mutual funds.

Federal Reserve Gov. Christopher Waller, a Trump appointee, said that while recent inflation readings are concerning, monetary policy would remain restrictive even if the central bank cuts interest rates by another quarter-point this month.

Market reaction to inflation numbers was "tempered," said Richard Flax, chief investment officer at Moneyfarm. But should inflationary pressures hold in 2025, "markets may anticipate that further rate cuts could be limited in scope, suggesting a more cautious investment outlook."

"A sharply lower new-issuance calendar, peak yields, large redemption money and mutual funds inflows are all positive performance factors for the market," BofA strategists said.

Despite the post-election selloff, inflows continued this week as LSEG Lipper reported investors added $1.263 billion to municipal bond mutual funds for the week ending Wednesday, compared to $658.5 million of inflows the prior week. High-yield inflows returned.

While supply falls next week as investors await their first Fed rate cut in four years, it should pick up after the FOMC, Barclays PLC said, adding the 30-day visible pipeline "is at relatively manageable levels at the moment." Bond Buyer 30-day visible supply is at $10.09 billion.

The August consumer price index showed inflation remains above the Federal Reserve's target level and makes a 50-basis-point rate cut next week unlikely, economists said. Further, many expect the market will be disappointed going forward, as future cuts will likely be shallower than expected.

"It is important to remember that as long as the Fed's next move is to lower policy rates, bonds will do well," said Jack McIntyre, portfolio manager at Brandywine Global. "The employment market is in better balance, which is very important for the Fed — even more than inflation."

Despite losses, munis are still outperforming USTs and corporates on a month-to-date and year-to-date basis, noted Cooper Howard, a fixed-income strategist at Charles Schwab.