Municipals saw a stronger tone after U.S. Treasuries improved on a rather lower-than-expected inflation print while equities made gains to shut out a volatile week.
“This month’s inflation print is kind of benign, but does it even matter? The underside-line is one other one or two months of benign inflation prints is not going to change the hawkish monetary policy pivot that was introduced on Wednesday,” said Olu Sonola, Fitch Rankings head of U.S. economic research. “The Fed is now more likely to wait to see how tariff and immigration policy unfolds over the subsequent coming months before we see one other rate cut.”
UST yields fell by two to 5 to shut the session while municipals were higher by a basis point or two out long.
“Such an abrupt change within the Fed’s posture demanded a repricing within the macro rates market and caused a powerful bear flattening of the Treasury curve on Wednesday,” noted BofA Global Research strategists led by Yingchen Li and Ian Rogow. “Our muni rates view could also be subject to Treasury rates risks resulting from low muni/Treasury ratios. Investors should take a defensive posture and wait for the Treasury rates market to settle.”
Investors should keep an “open mind regarding the trail of bond market moves,” they said, adding that they could need to placed on some hedges “to guard the post-election gains if the 10-year Treasury yield stays above 4.50%.”
Municipals are seeing losses of 1.82% in December, which has dragged down overall gains to simply 0.68% for 2024, per the Bloomberg Municipal Index. High-yield has seen higher losses of two.18% in December, bringing year-to-date gains to five.76%. Taxable municipals have fared the worst this month, with losses of two.56%, moving 2024 gains to 1.46%.
The short index remains to be within the black at 0.09% in December, with 2.99% returns in 2024.
“The muni market stays under an excellent deal of pressure,” said Mikhail Foux, managing director and head of municipal strategy and research at Barclays. “Rates have continued selling off, with yields up one other 15 basis points, nearing their six-month highs.
“Up to now two years now we have at all times seen yield buyers emerge when Treasury yields have reached the 4.5-5% range,” he said. “Typically, tax-exempts underperform during drastic rate selloffs, but it surely has not been the case this time around — municipal ratios have noticeably increased, especially within the long end, where they were quite wealthy to start out with.”
The 2-year municipal to UST ratio Friday was at 65%, the five-year at 65%, the 10-year at 68% and the 30-year at 83%, in accordance with 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.
Following the $857.1 million that investors pulled out of municipal bond mutual funds for the week ending Dec. 18, per LSEG Lipper data, J.P. Morgan’s Peter DeGroot noted the firm’s day by day observations showed a subsequent $214 million outflow Thursday, including $63 million out of mutual funds and $152 million out of ETFs.
“Some portion of those late 12 months outflows is probably going the results of the recent back-off in UST rates and extra tax-related trading thereof,” DeGroot said.
Yr-to-date inflows are actually tracking “modestly lower, at +$41.4 billion (+$27.6bn open-end funds/+$13.8bn ETFs), concentrated by way of duration (+$38.7bn long run) but somewhat more distributed by way of credit quality (+$25.4bn IG /+$16.0bn HY),” DeGroot said.
He added that it’s price noting HY municipal funds have attracted 13% of their aggregate assets under management from the start of the 12 months, “in comparison with just 4% for IG fund inflows relative to their AUM on the 12 months’s start.”
The market sentiment overall “seems quite poor in the mean time, as we proceed to see investors trimming their exposure this late within the 12 months, with bid-wanted activity picking up,” Foux said. “With the present rate sell-off, investors have a chance to reap their losses, and they might be quite invaluable this 12 months, because the equity market had one more big 12 months, and investors are sitting on large capital gains.”
Foux noted that dealers have also began de-risking, which has been customary for them in November-December.
“Now we have been expecting a comparatively difficult January, which was to come back on the back of a solid December,” Foux said. “Nonetheless, evidently the market sell-off has began sooner than we thought — to us current high-grade levels present a fairly decent entry point for tax-exempts, as January’s money might help stabilize the market, and we might not be against adding some exposure at current levels.”
There are not any sizeable deals on the calendar until the Latest Yr and Bond Buyer 30-day visible supply sits at just $2.4 billion.
AAA scales
MMD’s scale was firmer by two basis points out longer: The one-year was at 2.86% (inch) and a couple of.80% (unch) in two years. The five-year was at 2.87% (unch), the 10-year at 3.08% (unch) and the 30-year at 3.92% (-2) at 3 p.m.
The ICE AAA yield curve was bumped three to seven basis points: 2.92% (-7) in 2025 and a couple of.85% (-6) in 2026. The five-year was at 2.87% (-4), the 10-year was at 3.07% (-4) and the 30-year was at 3.88% (-3) at 4 p.m.
The S&P Global Market Intelligence municipal curve was barely higher out long: The one-year was at 2.88% (unch) in 2025 and a couple of.81% (unch) in 2026. The five-year was at 2.87% (unch), the 10-year was at 3.09% (unch) and the 30-year yield was at 3.87% (-2) at 4 p.m.
Bloomberg BVAL was little modified: 2.95% (unch) in 2025 and a couple of.80% (unch) in 2026. The five-year at 2.88% (unch), the 10-year at 3.12% (unch) and the 30-year at 3.83% (unch) at 4 p.m.
Treasuries were higher across the curve.
The 2-year UST was yielding 4.320% (-2), the three-year was at 4.382% (-2), the five-year at 4.382% (-5), the 10-year at 4.528% (-4), the 20-year at 4.805% (-3) and the 30-year at 4.718% (-2) on the close.