Tariffs

"With the initial announcement proving to be more aggressive than expected, the market responded overwhelmingly negatively," said Principal Asset's Seema Shah.

As the market absorbs the effects of the tariff rollout industry analysts are predicting a heavy dose of uncertainty in several key sectors of the municipal bond market.

At noon Thursday, muni yields had been bumped up to 12 basis points, depending on the curve, while UST yields rallied, with yields falling 13 basis points on the short-end.

Details surrounding the tariffs — which could be anything from reciprocal tariffs to finally implementing delayed tariffs on Canada and Mexico and on pharmaceuticals — have remained unclear, but uncertainty has plagued the market for weeks.

What's happening to the muni market is the "confluence of modest selling (via fund outflows and retail perhaps pausing during tax season); a heavy new issue calendar; and very thin near-term reinvestment expectations," said Matt Fabian, a partner at Municipal Market Analytics.

The Southeast has many of the largest ports and cargo airports in the country along with extensive foreign investment that creates exposure to trade turmoil.

The Lone Star state, the nation's largest exporter of goods, could be hit economically by a tariff war, particularly with Mexico, its biggest trading partner.

Short-end U.S. Treasuries rallied mid-morning, while UST yields were little changed out long, but ended the day weaker across most of the curve with the greatest losses out long. Munis were steady throughout the day.

Tax exemption concerns — though an elimination is unlikely — and the loss of federal stimulus will "most assuredly pull forward delayed issuance, with the first half of 2025 volume to exceed second half volume," said James Welch, a municipal portfolio manager at Principal Asset Management.

To close out the day, USTs remained mixed, with yields rising on the short end and falling out long, while munis were changed up to a basis point, depending on the curve.

Border cities like San Diego have obvious concerns about the impact of a trade war, but the ripples would extend into the South and Midwest, analysts say.

Operator ports, which rely on shipping volume for revenue, are more exposed to trade policy shifts than landlord ports, analysts said.

Reports of a trade deal and an election that seems to cement Brexit don’t remove the uncertainties the Federal Reserve has been worrying about.

Most observers were skeptical, even as markets rallied after President Trump said a trade deal with China is close.

The port saw a 19.1% year-over-year drop in port container traffic in October amid the trade war with China.

U.S. stocks dropped like a stone in response as Treasuries strengthened in a flight-to-quality bid.

The president said that European Central Bank President Mario Draghi would do a better job overseeing monetary policy in the U.S. than Fed Chairman Jerome Powell.

Municipal issuers are benefiting from lower interest rates and investor demand that seem at least partly driven by the nearly constant talk of tariffs and trade wars.

Long-term leases with container shipping tenants protect ports in the short to medium term should trade decline.

President Trump’s tariff threats may trigger a flight to quality to the benefit of the municipal bond market.