Secondary bond market

The management team sees opportunity in pockets that other investors avoid, like American Dream, Midwestern private colleges and senior living facilities.

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 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.

"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."

"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.

Heavy redemptions and coupon payments this month should help "stabilize" the market, said Barclays strategist Mikhail Foux.

Investors pulled more from municipal bond mutual funds in the final reporting week of 2024, but high-yield reverted to inflows to close out the year, adding to the sector's outperformance overall.

While municipals have outperformed USTs on the whole in 2024, they will close December with losses. How taxables perform in early 2025 coupled with macroeconomic and Washington policy uncertainty have municipal market participants on edge for what lies ahead.

Both IG and HY indices will likely end this year richer versus USTs and their benchmarks, "leaving very little cushion to absorb rate volatility," said Barclays strategist Mikhail Foux.

While Friday's muni session was muted, the damage of a volatile UST market, paired with low new-issue supply and year-end positioning, has weighed on the asset class in December.