Primary bond market

Issuance for next week falls to an estimated $5.151 billion, with $3.959 billion of negotiated deals and $1.193 billion of competitive deals on tap.

Investors added $2.028 billion to municipal bond mutual funds in the week ending Wednesday, following $251.7 million of outflows the prior week, according to LSEG Lipper data.

Issuance was led by a $2 billion retail pricing from the University of California in the negotiated market and a $1.2 billion competitive deal from Washington.

Underperforming since the calendar turned, "munis have continued to cheapen over the past three weeks as Treasury returns are about flat for the year while munis are down 0.31%," said Jason Wong, vice president of municipals at AmeriVet Securities.

The Regents of the University of California leads the negotiated calendar with $2 billion of general revenue refunding bonds.

Munis "responded in part to a better UST session [Wednesday] but weren't in a position from a supply standpoint to attempt to match the 10-15 basis point rally in taxables," said Kim Olsan, a senior fixed income portfolio manager at NewSquare Capital.

It could be the year's largest unrated municipal bond deal.

Municipals are underperforming USTs month-to-date, with the Bloomberg Municipal Index showing losses of 1.02% versus 0.92% for USTs as of Tuesday, but both are outperforming losses in corporates that are seeing 1.23% losses in January.

"Even though it will be priced to sell, such large supply in one week may be a struggle for the asset class," said Anders S. Persson, Nuveen's chief investment officer for global fixed income, and Daniel J. Close, Nuveen's head of municipals.

The muni market also faces an elevated new-issue calendar, which may put additional pressure on muni yields. Bond Buyer 30-day visible supply sits at $17.57 billion.

The billion-dollar deal will be the first bonds backed by the tax since it was created in 2019.

"'The market environment will likely become a bit more difficult in the coming week, as supply will jump to its highest level in weeks, while dealers are heavier than average," said Mikhail Foux, head of municipal research and strategy at Barclays.

Sizable deals for next week include $1.3 billion of real estate transfer tax revenue bonds from the Triborough Bridge and Tunnel Authority and $996.335 million of second series revenue bonds from the San Francisco International Airport.

The largest issuance the Local Government Commission approved was $387 million of bonds for Mecklenburg County.

The Federal Reserve will be more cautious and slow rate cuts going forward, according to minutes of the December Federal Open Market Committee meeting, released Wednesday.

Pressing issues like the shifts in banking teams at various firms following Citi's exit from the business to major ratings changes make the ranking.

"Further Treasury rate volatility or distractions from more favorable alternatives could at the very least moderate money invested into the municipal bond market," DWS strategists said. However, "these dynamics could create periods of opportunity to buy tax-exempt bonds at attractive yields in 2025."

After selling $500 million of revenue bonds in 2023, the turnpike authority could return to the market later this month with a $1.3 billion issue.

"These opportunities will surface periodically throughout the year against heavy supply and the increasingly uncertain path for the Fed, evolving fiscal policy, and volatile Treasury market backdrop," said J.P. Morgan strategists.

The Indiana Municipal Power Agency will issue $268.3 million of power supply system revenue bonds with a mix of new money and refunding debt.