Municipals faced more selling pressure Friday but outperformed U.S. Treasuries ahead of a much lighter supply picture, which should buoy the asset class in the ultimate weeks of the yr. This week’s collected losses have pushed returns into the red for the month, but municipals are still faring higher than USTs and corporates.

Triple-A scales saw yields rise three to eight basis points Friday, in response to reads of ICE and Bloomberg’s BVAL, but were unchanged in response to MMD and S&P. USTs saw losses of six to eight basis points.

Muni to UST ratios moved accordingly. The 2-year municipal to UST ratio Friday was at 61%, the five-year at 63%, the 10-year at 65% and the 30-year at 80%, in response to Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 63%, the five-year at 64%, the 10-year at 67% and the 30-year at 81% at 4 p.m.

“Tax-exempts outperformed within the sell-off, proving the market’s underlying strength, more in order this solid performance got here on the back of one more heavy supply week (likely the last one among the yr),” said Mikhail Foux, head of municipal strategy at Barclays. “In the long run the market has began to feel drained again, and investors have begun trimming their exposure, with bid-wanteds spiking to their highest level in greater than a yr.”

As of Friday morning, the Bloomberg Municipal Index was at -0.40% and +2.14% year-to-date while the High-Yield Index was at -0.41% and +7.67% in 2024. Taxable munis saw more pressure and are returning -1.01% in December and +3.08% thus far in 2024. USTs are within the red at -0.60% in December while corporates are returning -0.51% this month.

“After the 40 basis point or so rally because the election, [the muni market] is again in a waiting mode as latest issuance seems to be not so small for December thus far and muni/Treasury ratios richened significantly,” noted BofA Global Research strategists led by Yingchen Li and Ian Rogow. 

They imagine a muni rally “is more prone to resume next week after the Fed meeting when latest issuance volume truly enters the vacation pattern.”

The stronger post-election rally in munis “is driving their outperformance relative to taxable sectors, each because the election and for the MTD,” BofA noted.

For the month-to-date, tax-exempt IG is performing “more-or-less in line” with muni high-yield, but continues to lag muni high-yield in 2024 by almost 600 basis points. 

“Among the many exempt IG rating brackets, BBB returns are strongest MTD, outperforming single-A, which has the weakest return MTD, by 12 basis points,” BofA said. “Note that GOs are modestly outperforming revenue bonds MTD, though for the YTD are underperforming by almost 80bp.” The belly maturities are outperforming the wing maturities MTD, they said, adding the longest maturities have the strongest performance year-to-date.

12 months-to-date issuance as of Wednesday totals $493 billion, up 32% year-over-year, per BofA, already reaching a latest record high.

“We see 2024 ending with around $418 billion of principal redemptions and $158 billion of coupon payments against gross issuance of $503 billion,” they added.

The calendar falls to an estimated $2.5 billion for the week of Dec. 16, led by the one sizeable transaction of the week, high-grade Latest York City Transitional Finance Authority’s (Aa1/AAA/AAA/) $1.5 billion of future tax-secured subordinate bonds. There are several lower-rated housing and nonrated deals on the calendar and no competitive sales of size.

While the municipal market grew within the third quarter of 2024 amid the surge in supply, with mutual funds, exchange-traded funds and foreign buyers increasing their ownership of the asset class, Fed data shows bank ownership of munis fell to $497.2 billion, down 0.3% from the second quarter of this yr and a decrease of 4.3% from Q3 2023.

Broker and dealer muni holdings fell probably the most quarter-over-quarter, declining by 10.5% to $16.2 billion, in response to the most recent Fed data.

BofA noted that bank holdings versus the fourth quarter of 2017, the last quarter pre-Tax Cuts and Jobs Act, are down greater than 13%, and banks’ holdings are also down greater than 18% because the Fed began its tightening cycle in the primary quarter of 2022, but a lesser 12% because the regional bank problems emerged in first quarter 2023.

Looking ahead, “at this point, the Fed futures market is currently pricing in a December rate cut, a January 2025 pause, after which two more rate cuts later in the 1H25,” Li and Rogow said. “If these expectations work out, the bond market rally should extend through 1Q25 and yield curves would flatten further over the subsequent few months.”

For the muni market specifically, Foux said it has “come a great distance in 2H24, and got quite pricey, especially its long end.”

Despite the fact that the tax-exempt market “doesn’t have much upside, in our view, we might not be surprised if munis still get richer in the subsequent several weeks, as supply ought to be largely non-existent, although loads will depend upon the rates market given the FOMC meeting next week,” Foux said.

“Looking ahead and taking into consideration all muni-related uncertainties next yr, we might not chase performance here, and think higher to lighten holdings into late December, waiting for higher opportunities next yr,” he added.

Primary to return:
The Latest York City Transitional Finance Authority (Aa1/AAA/AAA/) is ready to cost Tuesday $1.5 billion of future tax-secured subordinate bonds, Fiscal 2025 Series E, serials 2026-2049, terms 2051, 2053. Jefferies LLC, Latest York

The National Finance Authority is ready to cost Thursday $68.831 million of nonrated River Ranch Project special revenue capital appreciation bonds, terms 2031. D.A. Davidson & Co.

The Hazelden Betty Ford Foundation Project (Baa1///) is ready to cost $66.945 million of revenue bonds, consisting of $31.79 million of Series A and $35.155 million of Series 2025B. Ziegler.

The Public Finance Authority is ready to cost $61.29 million of CFC-LSH-Amplify Lubbock Project multifamily housing revenue bonds (//BB-/). Ziegler.

The Finance Authority of Maine is ready to cost Tuesday $45 million of Casella Waste Systems, Inc. Project solid waste disposal revenue bonds (B1/B+//), serials 2047. BofA Securities.

The Health and Educational Facilities Authority, Missouri, (//BBB/) is ready to cost $41.61 million of Lutheran Senior Services Projects senior living facilities revenue bonds, Series 2025A. Ziegler.