The muni mark took a breather Thursday, as yields were little changed, while inflows into muni mutual funds exceeded $1 billion. U.S. Treasuries were slightly weaker and equities were mixed toward the close.
President Trump's tariff threats against America's primary trading partners could be bullish for bonds, somewhat mitigated by federal budget deficits, although federal tax policy could weigh on municipals, analysts at BCA report.
"Any inflationary impact from tariffs could lead to a more hawkish Fed policy but would also be a drag on medium-term economic activity," BCA says. "We anticipate more tariff announcements in the months ahead but view them as more of a bullish catalyst for bonds than a bearish one."
However, the analysts continue, "the [federal] budget is the main bond bearish political risk for 2025, and it still looms. Large unfunded tax cuts would boost both inflation expectations and bond term premia, sending yields higher."
For tax-exempt bonds "tax policy is the biggest uncertainty for municipal bonds in 2025," BCA says. "With full Republican control of Congress, there is no risk that the Tax Cuts and Jobs Act (TCJA) will expire. However, the fate of the State & Local Tax (SALT) deduction cap will likely be a point of negotiation. Some recent reporting has suggested that Republicans will seek to raise the $10,000 SALT cap as part of this year's tax bill, which would be negative for municipal bond demand. However, we have not yet seen draft legislation nor have budget negotiations begun."
Meanwhile, Commerce Trust says that munis, on a tax-equivalent basis, "offer compelling yields to investors seeking to generate income from their portfolios. For individuals in the top federal income tax bracket, top-rated AAA munis handily out-yield Treasury bonds at all points along the yield curve, with the advantage growing as one moves into longer and longer maturities."
The firm calculates the tax-equivalent yield assuming a 40.8% marginal income tax rate, including a 37% top federal bracket plus a 3.8% Medicare tax rate.
"Even higher yields can be found in lower-rated munis," Commerce Trust adds, "with BBB/Baa-rated bonds (the lowest investment grade category) offering tax-equivalent yields of over 6.5% for 10-year maturities and of over 8.0% for 30-year maturities. Those higher yields come with higher credit risk. However, the historical default risk of municipal issuers has been far below that of corporate issuers. In fact, BBB/Baa munis, on average, have defaulted at less than one-third the rate of BBB/Baa corporates over a 10-year period (1.0% vs. 3.5%)."
"Absolute yields on the long-end appear attractive based on their historical trading range, especially when considering our long-term projections for lower rates in 2025," says J.P. Morgan.
The two-year municipal to UST ratio Thursday was at 62%, the five-year at 63%, the 10-year at 65% and the 30-year at 84%, 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 83% at 3:30 p.m.
"Tax-exempt ratios largely suggest neutral relative value versus corporates and are somewhat cheaper versus taxable municipals," J.P. Morgan says.
"Yields on long-dated high-grade munis are near their one-year highs, with long UST rates closer to three-year highs," says J.P. Morgan.
Despite this, "municipals are finding support to push yields lower while supply is being digested," says Kim Olsan, a senior fixed-income portfolio manager at NewSquare Capital.
In particular, "it can be expected that high-tax, specialty states like New Jersey, New York and Massachusetts — whose 30-day net supply figures are well negative — will find supportive bid sides," she says, adding that "the balance of supply likely favors infrequent issuers while active credits may lag any price performance. Lower UST yields may also encourage refunding opportunities that could boost supply totals in coming weeks."
In particular, healthcare issues, which continue to see spread tightening, stand out, Olsan says. "Higher-rated healthcare credits are enjoying steady inquiry, which is translating into spread compression," she says. "Through various yield sets in the last five years, healthcare has outperformed a broad market index. Since 2020, a Bloomberg Barclay's Hospital index has returned an aggregate 5.6%, or 55 basis points excess to the main market."
In the primary market Thursday, the Dallas Independent School District (Aaa/NR/NR/AAA) priced $840.2 million of unlimited tax school building and refunding bonds, including $610.24 million of Series 2025B unlimited tax school building and refunding bonds and $229.96 million Series 2025C unlimited tax refunding bonds. The issue was priced by Ramirez & Co.
The $610.24 million Series 2025B bonds included 5s of 2/2026 at 2.63%, 5s of 2/2030 at 2.85%, 5s of 2/2035 at 3.01%, 5s of 2/2040 at 3.41%, 4.5s of 2/2045 at 4.12%, 5s of 2/2050 at 4.06%, and 4% term bonds of 2/2055 at 4.25%.
The $229.96 million Series 2025C included 5s of 2/2027 at 2.72%, 5s of 2030 at 2.85%, and 5s of 2/2034 at 2.99%. There is an optional call in 02/15/2034 at 100.00.
The Massachusetts Development Finance Agency (Aa1/AA+/NR/NR) priced through Barclays Capital $284.27 million Boston University Refunding Revenue Bonds Series 2025B-1. The Boston University issue included 5s of 10/2030 at 2.75%, 5s of 10/2035 at 3.03%, and 5s of 10/2040 at 3.34%.
In the competitive market, BofA Securities had the winning bid for $311.46 million Washington Suburban Sanitary District, Maryland (Aaa/AAA/AAA) consolidated public improvement bonds, which included $287.225 million of Consolidated Public Improvement Bonds of 2025 and $28.725 million of Second Series (Green Bonds).
The $287.225 million issue included 5s of 6/2025 at 2.68%, 5s of 6/2030 at 2.69%, 5s of 6/2035 at 2.96%, 5s of 6/2040 at 3.28%, 4s of 6/2045 at 4.00%, 4s of 6/2050 at 4.08%, and 4s of 6/2054 priced at 98. The Green Bonds included 5s of 6/2025 at 2.68%, 5s of 6/2030 at 2.69%, 5s of 6/2040 at 3.28%, 4s of 6/2045 at 4.00%, 4s of 6/2050 at 4.08%, and 4s of 6/2054 priced at 98. There is an optional call in 06/2035 at 100.00.
Fund flows
Investors added $1.124 billion to municipal bond mutual funds in the week ending Wednesday, following $741.6 million of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $329.7 million compared to the previous week's inflows of $335 million.
Tax-exempt municipal money market funds saw outflows of $62.3 million for the week ending Feb. 4, bringing total assets to $134.17 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 2.08%.
Taxable money-fund assets saw $34.08 billion added.
The average seven-day simple yield was at 4.05%.
The SIFMA Swap Index fell to 2.07% Wednesday compared to the previous week's 2.25%.
AAA scales
MMD's scale was unchanged: The one-year was at 2.58% and 2.60% in two years. The five-year was at 2.69%, the 10-year at 2.89% and the 30-year at 3.90% at 3 p.m.
The ICE AAA yield curve was bumped up to two basis points on the short end: 2.65% (-2) in 2026 and 2.60% (-2) in 2027. The five-year was at 2.68% (unch), the 10-year was at 2.91% (unch) and the 30-year was at 3.83% (unch) at 3:30 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.60% (+1) in 2025 and 2.61% (unch) in 2026. The five-year was at 2.68% (unch), the 10-year was at 2.91% (unch) and the 30-year yield was at 3.82% (unch) at 3 p.m.
Bloomberg BVAL was unchanged: 2.55% in 2025 and 2.61% in 2026. The five-year at 2.71%, the 10-year at 2.95% and the 30-year at 3.84% at 3:30 p.m.
Treasuries were slightly weaker toward the end.
The two-year UST was yielding 4.209% (+2), the three-year was at 4.228% (+2), the five-year at 4.274% (+3), the 10-year at 4.439% (+2), the 20-year at 4.702% (+1) and the 30-year at 4.648% (+1) at 3:30 p.m.
Jessica Lerner contributed to this report.
