Municipals ignored losses in U.S. Treasuries Friday ahead of one other week without new-issue supply to supply direction. Equities saw losses.
Triple-A muni yield curves were unchanged while USTs saw losses of as much as six basis points while the 10-year UST closed the session above 4.6%.
While Friday’s muni session was muted, the damage of a volatile UST market, paired with low new-issue supply and year-end positioning, has weighed on the asset class in December.
Because the year-end approaches, municipals will close December deep within the red. The Bloomberg Municipal Index is at -1.80% in December with +0.70% returns year-to-date. High-yield is seeing losses of two.03% this month but returning 5.92% in 2024.
Taxable munis are losing 2.50% in December with 1.53% gains year-to-date. Short index munis are at +0.15% for December and +3.05% in 2024.
USTs are seeing losses of 1.68% in December with returns at 0.43% in 2024 while corporates are at -1.86% in December and +2.20% in 2024.
“Much of the subsequent few weeks’ trading will concentrate on supply and demand, with the web figure suggestive of potential upward pressure should the person component (via individually managed account programs and open-end/exchange-traded funds) develop into more cautious,” Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
There aren’t any new-issues of size on the calendar the week of Dec. 30 and Bond Buyer 30-day visible supply sits at $5.55 billion, but “nearly an $8 billion differential exists between expected supply and implied demand from redemptions in the subsequent 30 days — which happens to coincide with the subsequent Federal Open Market Committee meeting,” she said.
January’s calendar is constructing across various sectors, Olsan noted. Washington State is on the competitive calendar with a complete of $1.05 billion of general obligation bonds the week before the FOMC meeting, several utility credits will price mid-month and native Texas issuance is already approaching $1 billion par, she noted.
January is traditionally a powerful month for munis, but elevated supply and Treasury rate volatility might be tailwinds, said Matthew Norton, chief investment officer of municipal bonds at AllianceBernstein.
January may find yourself being heavier month for issuance as “given the uncertainty around tax reform and the potential bills that might be passed, it’s totally possible we see that pull forward in supply,” Norton said.
But “in case you see elevated supply similtaneously [Treasury rate volatility], people could also be nervous of rates of interest moving around and potentially money coming out of mutual funds and money flowing out of the municipal bond market,” he said.
Olsan noted this yr’s fund flow momentum “has been mostly positive as yields held to a narrower range” than within the volatile years of 2022 and 2023. A “negative loop of upwardly trending yields creating NAV losses and outflows was largely absent this yr,” she said.
“Early 2025 yield trends will determine whether fund buyers remain committed,” Olsan said, adding that January fund flow data over the past 10 years has been negative only in 2022.
Yield trends in 2024 also show how lower-rated muni credits have outperformed.
“The credit story has been a robust one this yr, despite favorable high-grade yields for a lot of the yr,” Olsan noted.
Olsan checked out spreads between A-rated and AAA-rated GOs and revenue bonds in various parts of the curve. Within the 10-year range, the differential between A-rated GOs and revenues “has been negligible.”
“Implied spreads have averaged 32-35 basis points over the AAA MMD spot, with narrow trading ranges over the yr,” she said, adding, as in comparison with the more volatile 2023 cycle, this yr’s median spreads have only contracted about two basis points.
Longer maturities show wider gaps to AAA bonds but have also traded in a decent range, she said.
Single-A GOs due within the 20-year area carry spreads of +40/MMD and single-A revenues “are only a nominal five basis points wider,” Olsan noted. “Given the yield back up in December, absolute levels have reached 4.00% or higher.”
Returns within the single-A category this yr sit well above the broad index and higher-rated credits, she said.
Bloomberg Barclay’s A-rated index has gained 1.4% or 75 basis points above a predominant index and 140 basis points over AAA-rated bonds.
Revenue bonds overall have outperformed GOs by 60 basis points in 2024, posting a 0.8% gain. “That gap is narrower than the 2023 revenue index gain which was 120 basis points higher than GOs,” she said.
AAA scales
MMD’s scale was unchanged: The one-year was at 2.86% and a couple of.82% in two years. The five-year was at 2.87%, the 10-year at 3.08% and the 30-year at 3.92% at 3 p.m.
The ICE AAA yield curve was unchanged: 2.90% in 2025 and a couple of.84% in 2026. The five-year was at 2.88%, the 10-year was at 3.08% and the 30-year was at 3.87% at 3 p.m.
Bloomberg BVAL was unchanged: 2.97% in 2025 and a couple of.82% in 2026. The five-year at 2.90%, the 10-year at 3.14% and the 30-year at 3.85% at 3 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.88% in 2025 and a couple of.81% in 2026. The five-year was at 2.87%, the 10-year was at 3.08% and the 30-year yield was at 3.87% at 3 p.m.
Treasuries saw losses.
The 2-year UST was yielding 4.328% (flat), the three-year was at 4.368% (+1), the five-year at 4.461% (+3), the 10-year at 4.625% (+5), the 20-year at 4.905% (+6) and the 30-year at 4.817% (+6) at 4 p.m.