Secondary bond market

The short-end correction has been "driven by a solid labor market report, which pushed Treasury yields higher as expectations for additional Fed rate cuts tempered," said Alice Cheng, director of municipal credit and investor strategy at Janney.

Retail offerings from California and Connecticut led the market Wednesday.

Secondary selling pressure and the larger calendar weighed on the market Tuesday.

"On a month-to-date basis, AAA munis have outperformed Treasuries across the entire curve. … This outperformance can be attributable to an improvement in market technicals," said Daryl Clements, a portfolio manager at AllianceBernstein.

Munis have outperformed USTs and corporates by more than 1.0% month-to-date on the heels of this rally so far, BofA strategists said.

Munis saw cuts, albeit small ones, for the first time in nearly two weeks as yields rose up to four basis points, depending on the scale.

By the close, muni yields were bumped up to four basis points, depending on the curve, while UST yields rose two to five basis points.

As the "slope of the municipal yield curve remains extremely steep and long bonds are cheap relative to U.S. Treasuries," Daryl Clements, a portfolio manager at AllianceBernstein, predicts "long municipal bonds have a long way to go until they are considered fair value."

"This was a much-needed rally as the long end struggled throughout the year, but now has been pushed back into positive territory," said Jason Wong, vice president of municipals at AmeriVet Securities.

Tax-exempt munis, supported by USTs, are having a very good month as MMD yields are down 30 to 35 basis points out long, and both the investment-grade and high-yield indices are seeing gains of more than 2% month-to-date, Barclays strategists led by Mikhail Foux said.

Investors added $2.183 billion to municipal bond mutual funds in the week ended Wednesday, following $623.3 million of inflows the prior week, according to LSEG Lipper data.

October is looking to be another blockbuster month for supply, with several $1 billion-plus deals on the shadow calendar, said Pat Luby, head of municipal strategy at CreditSights. 

A mix of broader market dynamics and Chicago-specific pressures is driving the widening spreads, investors said.

The muni market is in a position to rally in the latter part of this year, said Daryl Clements, a portfolio manager at AllianceBernstein.

Monday's rally is a "continuation of what we are seeing," as the market is actively repositioning where it needs to go, said Alice Cheng, director of municipal credit and investor strategy at Janney.

The market strength is a carryover from Friday, when munis rallied upo 12 basis points after a weaker-than-expected jobs report solidified expectations for a September rate cut. This was the largest single-day rally since April.

Muni yields were bumped two to 12 basis points, depending on the scale, with the largest gains out long, and UST yields fell six to nine basis points, pushing the two-year UST to its lowest levels in over two years.

The rally stemmed from the weak nonfarm payrolls report and revisions brought down the three-month average to 29,000 jobs per month, further solidifying the chance of a rate cut in September, said Chris Brigati, managing director and CIO at SWBC.

Investors added $672.3 million to municipal bond mutual funds in the week ended Wednesday, following $590.4 million of inflows the prior week, according to LSEG Lipper data.

Looking solely at internal factors, "the municipal market itself is still doing well, reasonably via the temporary drop in new issue supply amid a more lasting reduction in reinvestment flows," said Matt Fabian, a partner at Municipal Market Analytics.