Municipal bond yields fell Friday following U.S. Treasuries’ gains after improved jobs data affirmed the Federal Reserve’s expected December rate cut path, while equities were mixed ahead of the close.

“Financial markets at the moment are pricing in a cut at this month’s [Federal Open Market Committee] meeting and two more next 12 months. Our call is for a complete of two cuts between now and the tip of next 12 months,” said Wells Fargo Investment Institute Senior Global Market Strategist Scott Wren.

Wren said his firm sees a fed funds rate within the 4%-4.25% range by 12 months end 2025, so it was “not a surprise 2-year and 10-year yields edged lower on the news.”

The underlying growth in labor demand “stays solid despite the small uptick within the unemployment rate — payrolls have grown by 172,000 per thirty days over the past three months, probably closer to 200,000 if we allow for the October distortions,” noted Brian Coulton, chief economist at Fitch Rankings. “At the identical time wage growth looks to have bottomed out at 4% in year-on-year terms and has crept as much as 4.4% on a 3 month on three month annualized basis.”

That will not stop the Fed from cutting rates again later this month, he said, adding “it’s going to give them pause for thought — 4.4% wage growth doesn’t really work with 2% price inflation.”  

Triple-A yields fell one to 2 basis points while govies improved by one to 5 basis points Friday afternoon with the very best performance on the short end.

Municipals are returning 0.31% in the primary five sessions of December and a couple of.86% year-to-date as issuance grows and investor demand appears to be ready to fulfill the provision.

Total issuance sat at $474.755 billion as of Nov. 30, per LSEG data, which was about $10 billion shy of 2020’s record 12 months.

Investors will see greater than $10 billion of issuance next week led by nearly $2.2 billion of sales tax revenue refunding bonds from the Dormitory Authority of the State of Latest York, $1.25 billion of fresh energy project revenue green bonds from the California Community Alternative Financing Authority and $570.865 million of sales tax receipts revenue refunding bonds from the Chicago Transit Authority.

Massachusetts will sell three competitive general obligation loans totaling $800 million Tuesday.

Bond Buyer 30-day visible supply is $12.92 billion.

“With the approach of year-end, certain dynamics are playing out in additional historical fashion — elevated bid list volume, a surge of issuance and credit spread contraction amongst some sectors,” said Kim Olsan, senior portfolio manager at NewSquare Capital. 

“Issuers are capitalizing on the stock-it-now-for-the-January-trade theme that always takes hold right now of the 12 months,” she said. 

The metrics related to demand are showing a supportive tone, Olsan said, pointing to mutual fund and exchange-traded fund flows that remain on the strong side. Open-ended funds have taken in a median of greater than $500 million per week within the last month and ETFs’ inflows totaled $635 million within the last week, she said.  

“There may be a case for buyers to capture yield opportunity with high-quality intermediate bonds trading above 3.00%,” she said.

Secondary selling suggests “portfolios are being aligned to either make the most of tax loss swaps or by those fascinated by accumulating inventory ahead of the brand new 12 months,” she said, adding that Bloomberg bid list tallies have steadily increased since Thanksgiving week and dealer positions are holding around $15 billion, which is 15% above the 12 months’s average level.

Valuations are wealthy, though, as municipal outperformance in November has ratios hovering within the low 60s on the short end and below 70% on the 10-year.

The 2-year municipal to UST ratio Friday was at 61%, the five-year at 63%, the 10-year at 66% and the 30-year at 82%, in accordance with Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 62%, the five-year at 62%, the 10-year at 65% and the 30-year at 81% at 3 p.m.

“Richer relative value across the curve has left all however the least liquid portions of the market appearing generally unattractive,” said Peter DeGroot, managing director at J.P. Morgan. “We expect higher opportunities to buy long discounts and bellwether high-yield around the discharge of non-consensus data or with unexpected policy developments. This is especially true given our emphasis on prospective uncertainty, volatility, and a backdrop of elevated tax-exempt supply.”

Next 12 months’s “January effect” will likely be muted resulting from heavier issuance and wealthy valuations reached by the tip of the 12 months, said Barclays’ strategist Mikhail Foux. “We recommend lightening up in late December.”

Foux said long-dated Treasury rates “might stay near current levels, while the front end might finally disinvert.”

“In our view, the 3-5-year a part of the muni yield curve should proceed doing well despite its relative richness; we also just like the 15-20-year portion,” he said. “With rates staying range-bound, we still see some upside for lower coupon bonds, and securities with 3-7 12 months calls.”

Primary to return:
The Dormitory Authority of the State of Latest York is about to cost $2.193 billion of state sales tax revenue refunding bonds (Aa1//AAA) Tuesday, consisting of $2.09 billion of Series 24B-1, $100 million of Series 24B-2 and $2.495 million of Series 24C. Morgan Stanley & Co. LLC.

The California Community Alternative Financing Authority is about to cost Tuesday $1.25 billion of fresh energy project revenue green bonds (Latest York Life Insurance Co.) (Aaa///), serial 2056. Goldman Sachs & Co. LLC.

The Chicago Transit Authority (/AA//AA) is about to cost Tuesday $570.865 million of sales tax receipts revenue refunding bonds, Series 2024A, serials 2025-2049. Jefferies LLC.

The National Finance Authority is about to cost Wednesday $435.357 million of municipal certificates, consisting of $153.611 million of Series 2024-4 Class A-US (/AA-//), $32.584 million of Series 2024-4 Class BUS Subordinate (/BBB//), serials 2042, $205.558 million of Series 2024ACA (/AA-//), serials 2039, and $43.603 million of Series 2024BCA subordinate social certificates (/BBB//), serials 2040. Jefferies LLC.

The Metropolitan Water Reclamation District of Greater Chicago (/AA+/AAA/) is about to cost Tuesday $317.745 million of general obligation limited tax capital improvement bonds, consisting of $253.815 million of 2024 Series A green bonds, $18.14 million of Series B green refunding bonds, $45.79 million of Series C refunding bonds, in addition to Series D and E bonds, the overall of which can be subject to tender offer results. Barclays Capital Inc.

The MIDA Mountain Village Public Infrastructure District, Utah, (////) is about to cost Wednesday $300 million of subordinate tax allocation revenue bonds. Piper Sandler & Co.

Douglas County School District RE-1, Colorado, (Aa1//AA+/) is about to cost Wednesday $270 million of general obligation bonds, insured by Colorado State Intercept Program, serials 2029-2044. RBC Capital Markets.

The Michigan Finance Authority (Aaa//AAA/) is about to cost Wednesday $249.805 million of state revolving fund programs revenue bonds, serials 2025-2048. BofA Securities.

The Capital Trust Authority, Florida, is about to cost $200.245 million of nonrated Alpha Lifestyle Partners, Inc. Project senior living facilities bonds. Stifel, Nicolaus & Company, Inc.

The Public Finance Authority is about to cost $172.595 million of nonrated Inperium Project revenue refunding bonds, terms 2034, 2044, 2049. KeyBanc Capital Markets.

Mansfield, Texas, (Aa1/AAA/AA+/) is about to cost $158.035 million of combination tax and revenue certificates of obligation, Series 2025, and general obligation refunding and improvement bonds, Series 2025. Raymond James & Associates, Inc.

The Iowa Finance Authority is about to cost Thursday $148.56 million of Lifespace Communities, Inc. revenue bonds (//BBB/). HJ Sims & Co.

Aurora, Colorado, (/AA+/AA+/) is about to cost Tuesday $137.44 million of first-lien water revenue bonds, serial 2025-2044, terms 2049, 2054. RBC Capital Markets.

The Philadelphia Redevelopment Authority (A1/A+/A+/) is about to cost Tuesday $127.84 million of City Service Agreement taxable revenue bonds, City of Philadelphia Neighborhood Preservation Initiative. Morgan Stanley & Co. LLC.

The Latest York State Housing Finance Agency (Aa1///) is about to cost Thursday $124.275 million of state personal income tax revenue bonds, economic development and housing sustainability bonds, Siebert Williams Shank & Co., LLC.

The San Luis Coastal Unified School District, California, (Aa1///) is about to cost Wednesday $115 million of GO Bonds Election of 2022, Series B refunding. Raymond James & Associates, Inc.

The Westminster Public Schools, Adams County, Colorado, (Aa2///) is about to cost Tuesday $111 million of tax-exempt and taxable general obligation bonds, insured by the Colorado State Intercept Program. RBC Capital Markets.

Adams County, Colorado, (Aa2/AA//) is about to cost Tuesday $103.885 million of certificates of participation, serials 2025-2044, terms 2049, 2054. Stifel, Nicolaus & Company, Inc.

The Illinois Housing Development Authority (Aaa///) is about to cost $101.065 million of tax-exempt non-AMT and taxable multifamily revenue bonds. J.P. Morgan Securities LLC.

The Sheboygan Area School District, Wisconsin, (Aa2///) is about to cost Tuesday $93 million of general obligation promissory notes, serials 2025-2044. Baird.

Competitive:
Massachusetts (Aa1/AA+/AA+/) is about to sell $800 million of general obligation bonds in three sales consisting of $210 million of GOs at 10 a.m., $315 million of GOs at 10:30 a.m. and $275 million of GOs at 11 a.m. eastern.

Suffolk County, Latest York, is about to sell $350 million of tax anticipation notes at 11 a.m. eastern.