Munis have seen losses over the past week, culminating with Thursday seeing the biggest cuts to triple-A yield curves, as issuance slowed and muni mutual funds reported outflows for the first time since the summer. U.S. Treasury yields rose and equities ended down.
Muni yields were cut two to 10 basis points, depending on the scale, while UST yields rose four to seven basis points.
Muni mutual funds saw outflows as LSEG Lipper reported investors pulled $316.2 million for the week ending Dec. 11, breaking a 23-week inflow streak following $1.15 billion of inflows the previous week.
High-yield municipal bond funds, though, saw inflows of $192.3 million compared to $533.6 million the previous week.
"This has been a period of time over the last few years where we are so sensitive to what's going on in the rates markets," said Mark Paris, chief investor officer and head of municipals at Invesco.
The muni market has been tied to Treasury rate systems since the Fed began hiking, and even with the Fed now cutting, "we're still in a world where there are some days where munis can outperform or underperform, but when the trend starts to be two or three days of negative Treasury yields, then it's just natural to see cuts," he said.
Muni to UST ratios rose slightly on the day's moves. The two-year municipal to UST ratio Thursday was at 62%, the five-year at 64%, the 10-year at 66% and the 30-year at 81%, according to Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 62%, the five-year at 63%, the 10-year at 66% and the 30-year at 81% at 4 p.m.
Yields have rallied a little bit too much, Paris said, noting the question facing the market now is, as Treasury rates go down from here, can long-end muni-UST ratios hang around to the low 80s?
Bids wanteds surged to $2.41 billion Wednesday — the highest figure in over two years and more than double 2024's average — likely driven by cash raises for recent deals and year-end positioning, said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
"The tight yield range that has prevailed may find some movement should USTs remain under pressure," she said.
Money market yields have become more volatile, as daily floater rates surged over 100 basis points and weekly resets have risen almost 75 basis points higher, she said.
Tax-exempt municipal money market funds saw investors pull $1.25 billion from the funds the week ending Dec. 9, bringing the total assets to $134.94 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 1.83%.
Taxable money-fund assets saw $6.94 billion added to end the reporting week.
The average seven-day simple yield for all taxable reporting funds was at 4.28%.
Among the larger national money markets, Olsan said "indicative yields are holding near 2% or 50-75 basis points below what intermediate fixed maturities offer," she said.
Investment-grade munis had a decent year, while high-yield has a very good year, Paris said.
Issuance in 2024 will reach record levels, and most of the supply was well absorbed, he said.
Next week is a full calendar week where there were normally not be much supply, he said.
However, the New York City Transitional Finance Authority is set to price $1.5 billion of tax-exempt future tax-secured subordinate bonds on Dec. 17, along with some other smaller deals on the horizon, Paris said.
Afterward, there will be virtually no supply through yearend.
Bond volume will be robust in 2025, as
Supply will pick up at the start of January, but the return of issuance depends on where Treasury rates go and "the flow picture," Paris said.
In the competitive market, Massachusetts (Aa1/AA+/AA+/) sold $210 million of GO consolidated loan of 2024 bonds, Series G, to BofA Securities, with 5s of 12/2028 at 2.55%, 5s of 2029 at 2.61%, 5s of 2034 at 2.81% and 5s of 2035 at 2.88%, callable 12/1/2034.
The state also sold $315 million of GO consolidated loan of 2024 bonds, Series H, to BofA Securities, with 5s of 12/2036 at 2.98%, 5s of 2039 at 3.12%, 5s of 12/2044 at 3.52% and 5s of 2045 at 3.58%, callable 12/1/2034.
Additionally, the state sold $275 million of GO consolidated loan of 2024 bonds, Series I, to Wells Fargo, with 5s of 12/2046 at 3.65%, 5s of 2049 at 3.77% and 5s of 2054 at 3.87%, callable 12/1/2034.
AAA scales
MMD's scale was cut six to 10 basis points: The one-year was at 2.71% (+6) and 2.59% (+6) in two years. The five-year was at 2.66% (+10), the 10-year at 2.86% (+10) and the 30-year at 3.70% (+10) at 3 p.m.
The ICE AAA yield curve was cut two to seven basis points: 2.70% (+2) in 2025 and 2.60% (+4) in 2026. The five-year was at 2.60% (+5), the 10-year was at 2.81% (+7) and the 30-year was at 3.62% (+7) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut three to 10 basis points: The one-year was at 2.76% (+3) in 2025 and 2.61% (+5) in 2026. The five-year was at 2.60% (+7), the 10-year was at 2.82% (+10) and the 30-year yield was at 3.64% (+10) at 4 p.m.
Bloomberg BVAL was cut five to nine basis points: 2.75% (+5) in 2025 and 2.59% (+5) in 2026. The five-year at 2.64% (+8), the 10-year at 2.88% (+9) and the 30-year at 3.55% (+9) at 4 p.m.
Treasuries saw losses.
The two-year UST was yielding 4.185% (+3), the three-year was at 4.155% (+3), the five-year at 4.178% (+4), the 10-year at 4.327% (+6), the 20-year at 4.622% (+7) and the 30-year at 4.552% (+7) at the close.
