Inflation

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.

The consumer price index number further complicates market expectations of Fed rate cuts and muni investors may want "to keep their powder dry" until they have a better idea of the Fed's timing, said CreditSights' Pat Luby.

The December consumer price index came in slightly stronger than expected, perhaps eliminating the possibility of a rate cut in March, analysts said.

Large reserves will insulate states against downgrades in the near future, one rating agency says.

The state managed to grow revenues above forecast for the first two months of the fiscal year despite the delayed tax filing deadline.

There hasn't been a huge return of capital in the muni market so far this year, with fund flows being rather anemic, said Chad Farrington, co-head of municipal bond strategy at DWS Group.

Despite this, August saw the largest monthly volume of 2023, helped by several billion-dollar deals and multiple Texas school district deals.

Tracey Manzi, senior investment strategist at Raymond James, talks with Chip Barnett about the fixed income markets today and how munis and Treasuries are doing. She says the number one issue clients are asking about is inflation. (20 minutes)

Another day of mixed inflation data led Treasury yields to rise but munis mostly stayed put after underperforming a UST rally earlier in the week. The market is also focused on the $9 billion of redemption flows coming on Tuesday.

Refinitiv Lipper reported $278.559 million of inflows into municipal bond mutual funds for the week ending Wednesday, led by exchange-traded funds.

Eric Merlis, managing director and co-head of global markets at Citizens Bank, talks with Chip Barnett about the economy and financial markets and what the Federal Reserve might do. He also discusses possible near- and long-term economic scenarios. (15 minutes)

Municipal bond mutual fund outflows continued as Refinitiv Lipper reported investors pulled $136.174 million from the funds for the week ending Wednesday following $855.719 million of outflows the week prior.

Escalating costs, particularly for wages, could strain budgets or drain reserves, the rating agency said.

While "munis are set up for better performance, perhaps modest single-digit returns, the near-term outlook for fund flows will make for a challenging read," Oppenheimer's Jeff Lipton said.

Bond traders have overestimated month-over-month headline inflation heading into four of the last seven Consumer Price Index releases, says strategist Raghav Datla.

Inflation joined supply chain struggles, wage pressures, and the labor shortage — most acutely felt with nursing staff — dragging down the sector's margins.

Amid rising construction costs and supply chain shortfalls, some California school bond projects are being redesigned, accelerated or delayed.