Securitization

However, "a long-lasting bond market rally seems unlikely given major structural shifts of higher bond supply and on uncertainty with demand," said Edward Moya, senior market analyst at OANDA.

"Despite the breathtaking selloff in longer rates, Barclays' macro strategists see no clear catalyst to stem the bleeding," Barclays strategists said. "Data are unlikely to weaken quickly or enough to help bonds."

The nature of municipal bonds is to help people, says Peter Hayes, "I really like that it's public purpose."

All eyes will be on Friday's report, though "it seems most leading indicators suggest job growth will remain healthy, which should keep the bond market selloff going strong," said OANDA's Edward Moya.

Municipal yields fell up to three basis points, depending on the scale, but underperform a better UST market.

UST rates are driving all things in the muni market, said Jon Mondillo, head of North American Fixed Income at abrdn.

There will be "choppiness in the municipal bond market through the end of the year," said Anders S. Persson, Nuveen's chief investment officer for Global Fixed Income, and Daniel J. Close, Nuveen's head of municipals.

The Bloomberg Municipal Index and High-Yield Index lost 3.3% and 3.9%, respectively, in September.

The last time muni mutual funds saw outflows top $1 billion was the week ending May 31 when they were $1.345 billion.

"The market has taken to heart the [Federal Open Market Committee] actions from last week," said Jeff Lipton, managing director of credit research at Oppenheimer Inc.

Yields have "risen substantially over the last week as the market seeks to find at least a minor level of balance or equilibrium," said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

"People are just kind of sitting on their hands and being careful because MMD is raising yields every day and people don't know which way this is heading," said John Farawell of Roosevelt & Cross.

The Texas Water Development Board leads the new-issue calendar with $1 billion of revenue bonds.

The general bias toward muni rates is that they would be a bit higher with technicals "being a little less supportive than they were in August, plus what we heard with from the Fed 'higher for longer,' and potentially another hike," said Jeff MacDonald, head of Fixed Income Strategies at Fiduciary Trust International.

As was expected, the FOMC held rates in a range between 5.25% and 5.50%, but the dot plot in the Summary of Economic Projections showed 12 of 19 members expect another 25-basis-point rate hike this year.

Fund flows "should be moving along a more positive trajectory, but they have yet to do so with munis unable to break free of the Treasury market's tight grip," Oppenheimer's Jeff Lipton said.

With a light new-issue calendar ahead of the FOMC meeting, "secondary flows may benefit from greater attention," said Kim Olsan, senior vice president at FHN Financial.

"We believe investors should take advantage of the current high rates environment: investors should pick and choose bonds selectively in the coming weeks in anticipation of this tightening cycle's end after November," BofA strategists said.

Refinitiv Lipper reported $116.737 million was pulled from municipal bond mutual funds for the week ending Wednesday after $798.474 million of outflows from the funds the previous week.

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.