Inflation

If the inflation figures begin to move lower, then there is a reasonable chance of working through this cycle of rising rates without experiencing a recession.

The 25-basis-point move to higher yields is the largest one-day change in triple-As since March 2020 when COVID began roiling markets. Munis could not ignore a continued selloff in UST led by inflation and recession concerns.

Ahead of the FOMC meeting, municipal issuers pull back. Investors will be greeted Monday $2.880 billion of new-issue supply.

More firms are revising issuance projections downward due to lower refunding and taxable volumes. Many participants say it is unlikely the market will hit issuance records reached in 2021 and 2020.

While a document search will not turn up the dreaded word “stagflation,” the minutes mention on multiple occasions that the FOMC sees risk to growth skewing toward the downside, and inflation risk to the upside.

Municipals improved for the fifth session in a row with 10- and 30-year triple-A yields falling 30 basis points since Thursday. Connecticut priced $1 billion-plus of GOs and saw yields lowered in a repricing.

The U.S. economy needs supply-side interventions rather than interest-rate hikes by the Federal Reserve that will fail to bring inflation under control, said Nobel laureate economist Joe Stiglitz.

Given the volatility of risk assets is likely to remain high, and the focus on the flight to safety increases, all fixed-income assets could benefit as a result, including municipals, Barclays strategists say.

Some worry that governments will use new infrastructure funds for generic, shovel-ready projects, or even tax cuts, instead of collaborative plans that could transform regions.

On the buy-side, weakness, outflows, supply issues, and poor liquidity are making life challenging for municipal bond investors. The same could be said for issuers.