Bond yields rallied as investors turned to safe-haven assets, while equities plummeted a day after President Donald Trump announced severe tariffs on nearly all goods imported from other countries.
The two-year municipal to UST ratio Thursday was at 68%, the five-year at 72%, the 10-year at 76% and the 30-year at 91%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 65%, the five-year at 68%, the 10-year at 73% and the 30-year at 91% at 4 p.m.
"With the initial announcement proving to be more aggressive than expected, the market responded overwhelmingly negatively, with stock futures trading lower and the U.S. dollar weakening further," said Seema Shah, chief global strategist at Principal Asset Management. "U.S. Treasuries have rallied … as the market tries to digest the conflicting growth and inflation impacts."
Under Trump's sweeping new policy, the U.S. will impose a 10% tariff on all imports from all other nations, starting April 5, with higher reciprocal tariffs on "specified trading partners deemed to have excessive tariff or non-tariff barriers," from April 9 onward, said UBS strategists.
Bond yields rallied throughout the day. Muni yields were bumped up to 12 basis points, depending on the curve, at noon while UST yields rallied, with yields falling 13 basis points on the short-end.
Near the close, muni yields were bumped eight to 12 basis points, depending on the curve, while UST yields fell one to 16 basis points, with the greatest gains on the front of the curve.
Yields have fallen "pretty conservatively," which isn't surprising, especially since most market participants were watching what the Federal Reserve will do, said Tom Kozlik, managing director, head of public policy and municipal strategy at HilltopSecurities.
"One of the main catalysts of what the Fed is going to be having to react to now is this," including determining whether tariffs are viewed as a further policy uncertainty or a trade war, he noted.
"For the time being, market expectations for Fed rates have not shifted, with three cuts still expected this year," Shah said.
However, she noted, "with price stability still not fully achieved, and tariffs threatening to push prices higher, policymakers may not be able to provide as much monetary support as the growth picture requires and could even bind them from cutting rates at all," she noted.
"If the Fed believes that softer growth will exert downward pressure on inflation in the medium-term (provided long-term inflation expectations remain anchored), the path to policy easing is still plausible," Shah said.
Federal Reserve Chair Jerome Powell speaks Friday and "may offer some insights as to how the central bank is viewing this very challenging policy predicament," she said.
Trump imposed tariffs during his first administration, but it didn't have the impact that some economists thought it would have, albeit that was only a 12% tariff against China, said Peter Delahunt of StoneX.
On Thursday, Trump announced an extensive list of tariffs for many countries, on top of the already-enacted tariffs on Canada, Mexico and China.
Thursday's "announced tariffs include a 34-percentage-point increase to the rate on China (bringing the total increase this year to 54%), a 24% tariff on Japan, 20% on the European Union and 31% on Switzerland," said UBS strategists.
Canada and Mexico were excluded from the list, "suggesting they will continue to face 25% tariffs for non-USMCA-compliant goods, but no additional levies," Shah said.
Energy products; sectors already facing additional tariffs — like aluminum and steel — and other sectors that are subject to investigations are currently exempt, but this may prove to be temporary as additional sectoral tariffs are likely to be applied, she said.
"The market sentiment is just confusion, fear, and also wait-and-see what's going on," said Alice Cheng, director of municipal credit and investor strategy at Janney.
"The market right now is a little bit hard to gauge because there are so many different things going on," she said. "The biggest fear is how this impacts our infrastructure and capital projects? And essentially, how does that affect credits? And the credit qualities and financing infrastructure that we need going forward, can issuers absorb all the rising costs? Would they be passing it down to consumers or taxpayers? You know which sector will be impacted the most?"
"New tariffs imposed by the U.S. government could affect state and local governments' economic growth by undermining trade-dependent industries," said Ted Hampton, vice president and senior credit officer at Moody's Ratings.
"This will be most severe in regions reliant on agricultural commodities and auto manufacturing, and could strain economic and fiscal stability," he said. "While some short-term benefits may arise from higher sales tax revenue as prices increase, these gains would be insufficient to offset prolonged economic challenges."
And while tariffs were front of mind this week, Delahunt believes the budget is a bigger worry for the muni market than tariffs, which could help lower the deficit, he noted.
The average estimate from economists is that tariffs will bring in $600 billion over 10 years. Yet, at the same time, the administration wants to extend the tax cuts, which the Congressional Budget Office estimates as increasing the deficit by $4.5 trillion over the 10 years, according to Delahunt.
Tariffs are not scored by the CBO, so they wouldn't even be included in the budget resolution, he said.
"So the bigger issue is where will the offsets come from to pay for this additional $4.5 trillion and that's where you heard more discussions now about potentially impacting or reducing the municipal tax exemption," he said.
Issuance
In the primary market Thursday, Jefferies priced for the California Educational Facilities Authority (Aa2/AA//) $600 million of University of Southern California revenue bonds, Series 2025A, with 5s of 10/2035 at 3.01% and 5s of 2055 at 4.12%, callable 10/1/2035.
In the competitive market, the Gwinnett County School District, Georgia, (Aaa/AAA//) sold $332.67 million of GO refunding bonds to BofA Securities, with 5s of 2/2026 at 2.37%, 5s of 2030 at 2.66%, 5s of 2035 at 3.07% and 5s of 2036 at 3.14%, noncall.
Fund flows
Investors pulled $231.9 million from municipal bond mutual funds in the week ending Wednesday, following $573.4 million of outflows the prior week, according to LSEG Lipper data. This marks four consecutive weeks of outflows.
High-yield funds saw outflows of $95.9 million compared to the previous week's inflows of $147.7 million.
Tax-exempt municipal money market funds saw inflows of $809 million for the week ending April 1, bringing total assets to $135.92 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds fell to 2.64%.
Taxable money-fund assets saw $2.25 billion pulled.
The average seven-day simple yield was at 4.01%.
The SIFMA Swap Index fell to 2.72% on Wednesday compared to the previous week's 2.87%.
AAA scales
MMD's scale was bumped 10 to 12 basis points: The one-year was at 2.51% (-10) and 2.53% (-10) in two years. The five-year was at 2.69% (-12), the 10-year at 3.09% (-12) and the 30-year at 4.07% (-12) at 3 p.m.
The ICE AAA yield curve was bumped eight to 11 basis points: 2.52% (-8) in 2026 and 2.55% (-8) in 2027. The five-year was at 2.70% (-11), the 10-year was at 3.07% (-11) and the 30-year was at 4.12% (-8) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped 10 to 11 basis points: The one-year was at 2.51% (-10) in 2025 and 2.52% (-10) in 2026. The five-year was at 2.71% (-11), the 10-year was at 3.09% (-11) and the 30-year yield was at 4.07% (-11) at 4 p.m.
Bloomberg BVAL was bumped eight to 11 basis points: 2.43% (-8) in 2025 and 2.52% (-9) in 2026. The five-year at 2.71% (-9), the 10-year at 3.04% (-10) and the 30-year at 4.06% (-11) at 4 p.m.
Treasuries rallied.
The two-year UST was yielding 3.708% (-16), the three-year was at 3.678% (-15), the five-year at 3.753% (-13), the 10-year at 4.056% (-8), the 20-year at 4.506% (-3) and the 30-year at 4.490% (-1) near the close.
