Municipals sold off Thursday, playing catch as much as the U.S. Treasury’s prolonged rout across a lot of the curve. Equities ended mixed as all markets further digested macroeconomic uncertainty and volatile policy swings coming out of Washington.

Muni yields rose 12 to 19 basis points, depending on the dimensions, while UST yields rose as much as seven basis points out long.

Ratios rose because of this. The 2-year municipal to UST ratio Thursday was at 65%, the five-year at 65%, the 10-year at 68% and the 30-year at 83%, based on Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 67%, the five-year at 66%, the 10-year at 69% and the 30-year at 84% at 4 p.m.

“Munis are grappling with a storm of uncertainty,” said James Pruskowski, chief investment officer at 16Rock Asset Management.

“Policy proposals from the brand new administration blur the road between talk and motion, the FOMC’s hawkish cut has shaken sentiment, and holiday illiquidity is amplifying stress,” he said. “Tax-loss swaps are fueling selling, while volatility keeps buyers parked in money. Still, absolute yields remain the driving force.”

Retail investors have taken note of the volatility as municipal bond mutual funds saw more outflows. LSEG Lipper reported investors pulled $857.1 million for the week ending Dec. 18, following $316.2 million of outflows the previous week.

High-yield municipal bond funds also saw outflows of $68.7 million in comparison with $192.3 million of inflows the previous week.

“With thin supply until late January and a robust reinvestment period, the stage is about for a compelling opportunity,” Pruskowski said.

The weakness got here on the heels of the numerous selloff out there Wednesday, with stocks sharply lower and UST yields and the dollar significantly higher following the Federal Open Market Committee meeting, said JoAnne Bianco, a partner and senior investment strategist at BondBloxx Investment Management.

As expected, the Fed cut rates 25 basis points, however the Fed Chair Jerome Powell’s post-meeting comments in regards to the “remarkable strength of the U.S. economy and the brilliant outlook probably made many market participants wonder why [the Fed] cut rates in any respect,” she said.

During the last week and a half, the 10-year UST has risen over 40 basis points, Bianco noted.

A number of the changes made within the FOMC statement indicate the Fed could also be starting to appreciate that inflation might not be tamed, she noted.

“So of their Summary of Economic Projections, the Fed increases its estimate for PCE inflation to 2.5% from 2.1% and so they said that this measure won’t get right down to 2% until 2027,” Bianco said.

Next 12 months will see a recent presidential administration, and there is the potential for tax cuts, tariffs and deregulation, she said.

“All of this stuff pointing to the view that that the economy goes to stay strong next 12 months, and investors may have a variety of opportunities in financial assets, including fixed income, when it comes to the upper yields,” Bianco said.

Yields might be higher for longer, but that presents a possibility for investors, she said.

“A reconciliation will occur of where near-term rates are headed following FOMC communications related to 2025 actions,” said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.

Tax-exempts will see some supportive aspects, but some metrics could also be signaling the event of further adjustments, she said.

Munis “take pleasure in a supply reprieve for a couple of weeks, which should help secondary bidsides,” she said.

Implied net demand in the subsequent 30 days stands at negative $11.9 billion, with dealers taking some comfort in that figure, Olsan said.

Nonetheless, dealers also needs to be mindful that issuance could “construct early” in 2025, especially “if rates hold on the upper range and issuers sense market timing becomes more relevant,” she said.

During the last 10 years, January issuance has averaged $27 billion, “which could prove constructive if next month’s supply does are available near that level as redemptions total about $20 billion,” Olsan said.

“The credit curve has rewarded higher-yielding issues this 12 months, but a more tentative tone could bring wider spreads within the single-A, BBB and below-BBB ranges,” she said.

High-yield mutual fund inflows have been a “consistent draw” within the wake of rate volatility, Olsan said.

Nonetheless, following the response of the Federal Open Market Committee meeting, “sub-investment grade trades pointed to wider levels,” she said.

A sale of Ba3/NR Houston TX Airport (subject to AMT) 5.25 s due 2033 printed at 4.53%, spread +161/BVAL, which was nine basis points wide to a late November sale at a yield of 4.39%, Olsan said.

With the pullback occurring this month, high-yield munis lost 1.10%, “lagging the broad market by 15 basis points and the AA-rated index by 22 basis points,” she said.

With rate uncertainty, flows can regularly “increase up” in credit as buyers seek safety and liquidity, she said.

With December’s total issuance never reaching an outsized figure — supply month-to-date stands at $30.16 billion — tax-exempt yields outperformed their taxable counterparts, though there could also be further adjustments to return, Olsan said.

For the reason that first rate hike in March 2022, she said the 10-year AAA BVAL yield has “traded to a median -126 basis points against the 10-year UST.”

“The present spread is -156 basis points, for a spot of 30 basis points of implied ‘richness’ to the UST yield,” she said.

“A move toward a normalization of the AAA/UST relationship would place the 10-year AAA yield within the 3.25% vicinity, which last occurred in November 2023,” Olsan said.

Respective taxable equivalent yields would increase to around 5.50%, with longer-dated bonds surpassing 4.00% and generating TEYs above 6.50%, she said.

CUSIP requests fall
The combination total of identifier requests for brand spanking new municipal securities — including municipal bonds, long-term and short-term notes, and business paper — fell 30.4% versus October totals. On a year-over-year basis, overall municipal volumes are up 10.0%.

Texas led state-level municipal request volume with a complete of 177 recent CUSIP requests in November, followed by Recent York (75) and Indiana (63).

There was a drop of 33.5% month-over-month for municipal bond identifier requests, but these requests are still up 9.3% year-over-year.

AAA scales
MMD’s scale was cut 15 basis points: The one-year was at 2.86% (+15) and a couple of.80% (+15) in two years. The five-year was at 2.87% (+15), the 10-year at 3.08% (+15) and the 30-year at 3.94% (+15) at 3 p.m.

The ICE AAA yield curve was cut 14 to twenty basis points: 2.99% (+20) in 2025 and a couple of.90% (+18) in 2026. The five-year was at 2.91% (+15), the 10-year was at 3.11% (+14) and the 30-year was at 3.91% (+14) at 4 p.m.

The S&P Global Market Intelligence municipal curve was cut 12 to 19 basis points: The one-year was at 2.88% (+12) in 2025 and a couple of.81% (+15) in 2026. The five-year was at 2.87% (+15), the 10-year was at 3.09% (+19) and the 30-year yield was at 3.89% (+17) at 4 p.m.

Bloomberg BVAL was cut 14 to 19 basis points: 2.95% (+15) in 2025 and a couple of.80% (+15) in 2026. The five-year at 2.88% (+15), the 10-year at 3.12% (+14) and the 30-year at 3.83% (+15) at 4 p.m.

Treasuries were weaker five years and out.

The 2-year UST was yielding 4.320% (-4), the three-year was at 4.345% (-1), the five-year at 4.429% (+3), the 10-year at 4.571% (+6), the 20-year at 4.834% (+6) and the 30-year at 4.742% (+7) on the close.