Municipals lost more ground Wednesday, but outperformed a selloff within the U.S. Treasury market, after the Federal Open Market Committee signaled fewer rate cuts on the horizon, with a probable pause in January. Equities also sold off, with the Dow Jones Industrial Average hitting a 10-day losing streak, the longest because the Seventies.
As expected, the FOMC lowered the fed funds 25 basis points to a spread between 4.25% and 4.50%, while the Summary of Economic Projections reduced the expected variety of cuts to 2 in 2025 from the previous estimate of 4.
The SEP changes, with fewer rate cuts expected, pushed up bond yields, said Chris Low, chief economist at FHN Financial, noting “the most important increase in two- and three-year notes and smaller increases in longer maturities, reflecting the expected pause, then resumed easing evident within the dot plot.”
Triple-A muni yields rose two to 3 basis points while Treasury yields rose as much as 15 basis points after the FOMC news. The UST 10-year topped 4.5%.
Ratios rose barely on the day’s moves. The 2-year municipal to UST ratio Wednesday was at 61%, the five-year at 63%, the 10-year at 66% and the 30-year at 82%, based on Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 64%, the five-year at 65%, the 10-year at 68% and the 30-year at 82% at 4 p.m.
Jochen Stanzl, chief market analyst at CMC Markets had two takeaways from the FOMC statement. “The Fed is not any longer just considering lower rates of interest, however the timing and extent of future rate hikes,” plus there was a dissenting vote from Federal Reserve Bank of Cleveland President Beth M. Hammack, who preferred to maintain rates where they were. “What we’re seeing is clearly a signal that the Fed is sort of done cutting rates.”
Stanzl expects “a significant pause,” with the Fed being “far more conservative going forward, as short-term yields are vulnerable to rising again. Ten-year yields could rise to five% and even 6% if markets begin pricing in higher growth and increased inflation for 2025. The Trump blessing could quickly turn right into a curse. If market yields rise again, the Fed is unlikely to beat back against these forces.”
Because the market prepares for 2025, there’s a number of uncertainty around what the brand new administration will mean for the macroeconomic environment and rates of interest, the latter of which could also be impacted by policy across the deficit, said Steve Shutz, portfolio manager and director of tax-exempt fixed income at Brown Advisory.
The Trump administration might also potentially double down on tariffs, with market participants wondering, “What does that ‘America First’ type of policy do for the deficit after which potential inflation second-order effects,” he said.
For the muni market, the subject du jour is the tax policy, resembling whether the 2017 Tax Cuts and Jobs Act can be prolonged, which Shutz expects to occur.
Nonetheless, there’s the potential addition of provisions that might get “layered on” even beyond that, he said.
“There’s even talk of the specter of the tax exemption,” with market participants split on how and when, if in any respect, it’s going to occur, he said.
“The noise around uncertainty with things like that might drive some demand volatility for the asset class,” Shutz said.
Supply has been the massive story this 12 months as issuance approaches $500 billion, above record levels of 2020 and 2021, Shutz said.
Last week was the ultimate week of huge new-issue numbers as supply slowed this week because of the Fed meeting and the upcoming holidays, he said.
Most on the Street expect supply to be upward of $500 billion, with Shutz noting there won’t be enough “rate of interest volatility to cause issuers to dial back.”
A part of this 12 months’s growth was that from a fundamental standpoint, “a number of the stimulus money given to municipalities is being spent down,” he said, adding that can proceed to be the case in 2025, pushing spreads “relatively tight,” Shutz said.
Fund flows were again in positive territory with the Investment Company Institute reporting Wednesday that $1.04 billion flowed into municipal bond mutual funds for the week ending Dec. 11, following $532 million of inflows the previous week. This marks 18 consecutive weeks of inflows, per ICI data.
Nonetheless, this differs from LSEG Lipper, which reported $316.2 million of outflows for that week, ending a 23-week inflow streak.
Exchange-traded funds saw inflows of $114 million after $478 million of inflows the week prior.
There’ll proceed to be a “constructing in demand” for munis in 2025 as individually managed accounts and ETFs proceed to grow market share, Shutz said.
“They have been an enormous a part of the positive net inflows into the market,” Shutz said.
Inflows into mutual funds have returned, nevertheless it’s been a more “gradual growth” this 12 months, with performance likely stabilizing within the asset class, he said.
And the “retail investors who ultimately buy mutual funds will get more confidence in putting flows back into that space,” Shutz said.
Historically, during easing cycles, there’s been sustained positive muni mutual fund influence, “so I do not know that we’re in for a dramatic windfall of inflows, nevertheless it must be a component of the positive environment,” he said.
FOMC
In his press conference, Federal Reserve Board Chair Jerome Powell said, the speed cut “was a more in-depth call,” because the labor market is cooling while inflation “is broadly heading in the right direction.” He added, “We see ourselves as still heading in the right direction to proceed to chop” rates next 12 months.
Policy stays “meaningfully” restrictive, he said, but “significantly closer to neutral.” As such the Fed will be cautious about future moves. When asked concerning the neutral rate, Powell reiterated, it is not clear what neutral is, “but we’re 100 basis points closer to it.”
Regarding tariffs, Powell said, “it’s totally premature to attempt to make any type of conclusions.”
While a rate hike next 12 months is not likely, Powell said, “it will probably’t be ruled out.”
“While the Fed opted to round out the 12 months with a 3rd consecutive cut, its Latest 12 months’s resolution appears to be for a more gradual pace of easing,” said Whitney Watson, global co-head and co-chief investment officer of Fixed Income and Liquidity Solutions inside Goldman Sachs Asset Management.
Changes to the SEP projections were “hawkish,” she said. “We expect the Fed to opt to skip a January rate cut, before resuming its easing cycle in March.”
Don’t expect a January cut, said Brian Rehling, head of world fixed income strategy at Wells Fargo Investment Institute. “We search for the Fed to be far more deliberative and remain in an information dependent holding pattern because it pertains to future rate cuts.”
An uncertain outlook is exacerbated by a latest incoming president, said Richard Flax, chief investment officer at Moneyfarm. “Each markets and the Fed are in a wait-and-see mode regarding the impact of those policies on future economic conditions. The important thing query stays: how much further do rates must be cut to realize desired economic outcomes? With the information finally balanced, the Fed is more likely to take a cautious approach from here.”
Had a rate cut not been expected, the Fed might need held rates, said Jack McIntyre, portfolio manager at Brandywine Global. “The Fed has entered a latest phase of monetary policy, the pause phase. The longer it persists, the more likely the markets could have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025.”
The revisions to the SEP suggests “this was a reluctant reduction — one designed to provide markets a little bit of comfort because the Fed lays the groundwork for a more hawkish approach to policy in 2025,” said Seema Shah, chief global strategist at Principal Asset Management.
“Definitely, the economic and inflation backdrop shouldn’t be one which screams a necessity for meaningful policy stimulus, while the incoming administration may give them a severe inflation headache next 12 months,” she added. “The bias should still be further monetary easing, but caution and patience are clearly required at this stage.”
“For the reason that Fed has began its cutting cycle 10-year yields are 85bps higher and continuing to climb,” noted Byron Anderson, head of fixed income at Laffer Tengler Investments. “The soft landing has been achieved, take the win already.”
Inflation stays “well above goal,” while “unemployment has plateaued and yet the Fed keeps cutting rates,” he said. “Which of its dual mandates is it protecting the economy from by cutting?”
“The Fed seems to have switched back to prioritizing inflation risks over unemployment, readying for a January skip and potentially an prolonged pause in 2025, if inflationary pressures persist and the economy stays robust,” said Dan Siluk, head of world short duration & liquidity and portfolio manager at Janus Henderson Investors.
AAA scales
MMD’s scale was cut two to 3 basis points: The one-year was at 2.71% (unch) and a pair of.65% (+2) in two years. The five-year was at 2.72% (+2), the 10-year at 2.93% (+3) and the 30-year at 3.79% (+2) at 3 p.m.
The ICE AAA yield curve was two to 3 basis points: 2.77% (+2) in 2025 and a pair of.71% (+2) in 2026. The five-year was at 2.73% (+2), the 10-year was at 2.95% (+2) and the 30-year was at 3.76% (+3) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut as much as basis points: The one-year was at 2.76% (unch) in 2025 and a pair of.66% (+5) in 2026. The five-year was at 2.72% (+2), the 10-year was at 2.90% (+6) and the 30-year yield was at 3.72% (+6) at 4 p.m.
Bloomberg BVAL was cut as much as five basis points: 2.80% (+2) in 2025 and a pair of.65% (+1) in 2026. The five-year at 2.73% (+2), the 10-year at 2.98% (+3) and the 30-year at 3.69% (+6) at 4 p.m.
Treasuries sold off.
The 2-year UST was yielding 4.357% (+11), the three-year was at 4.358% (+14), the five-year at 4.405% (+16), the 10-year at 4.506% (+12), the 20-year at 4.76% (+10) and the 30-year at 4.655% (+8) on the close.
Primary to come back:
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.
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 (//BB-/) is ready to cost $61.29 million of CFC-LSH-Amplify Lubbock Project multifamily housing revenue bonds, consisting of $54.3 million of Series 2024A-1, $1.465 million of Series 2024A-2 and $5.525 million of Series 2024B. Ziegler.
The Missouri Health and Educational Facilities Authority (//BBB/) is ready to cost $41.61 million of Lutheran Senior Services Projects senior living facilities revenue bonds, Series 2025A. Ziegler.
Competitive
The Triborough Bridge and Tunnel Authority is ready to sell $186 million of second subordinate revenue bond anticipation notes, Series 2024A, at 10:45 a.m. Thursday.
Lynne Funk and Gary Siegel contributed to this report.