Municipals were firmer Thursday as inflows into muni mutual funds continued. U.S. Treasury yields were little changed and equities ended mixed.
The two-year municipal to UST ratio Thursday was at 64%, the five-year at 64%, the 10-year at 66% and the 30-year at 83%, according to Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 63%, the five-year at 63%, the 10-year at 65% and the 30-year at 81% at 4 p.m.
Over the last several years, the muni market has been very beholden to USTs, said Mark Paris, chief investment officer and head of municipals at Invesco.
"We're going to disconnect that quickly from Treasuries, but rates are kind of high [and] the Fed's probably got another move in it, at least that," he said. "There is going to be some push-pull between energy prices and other things that could keep inflation at least sideways."
The last time the 10-year was above 5%, inflation was over 8%, but that is unlikely to happen in the near-term, Paris said.
"You have to take a deep breath every day, deal with the headlines that may come out, but understand what you're looking at," he said.
Some bond participants who have gotten beaten up on their NAVs or their bond prices the last couple of years, are "once bitten, twice shy," prompting them to be cautious this year, Paris said.
The new-issue calendar fell this week due to the Federal Open Market Committee meeting, but preliminary issuance for January shows the estimated $5.2 billion was enough to push supply for the month up 6.9% year-over-year to $34.023 billion.
Similar to last year, this month was helped by mega deals, including two billion-dollar-plus deals this week: the Oklahoma Turnpike Authority with $1.3 billion of Oklahoma Turnpike System second senior revenue bonds and the Columbus Regional Airport Authority with $1.2 billion of John Glenn Columbus International Airport airport revenue bonds.
Some of the issuers that handle these sizable deals are "well equipped," Paris said, noting they come to market frequently, have done a lot of roadshows and have built up the deal.
In a way, bringing a deal to market is almost like securing votes in Congress, as the issuer has to get the necessary approval before the deal can get done, he said.
There will be a "good handful" of mega deals in the market in the first half, with several large deals on tap for February, Paris said.
The Dallas Independent School District will price the week of Feb. 3 $776 million of PSF-insured bonds.
The New York City Transitional Finance Authority will price the week of Feb. 10 $1.5 billion of tax-exempt and taxable future tax-secured refunding bonds.
Ohio will price the week of Feb. 10 $770 million of higher education GOs.
The South Carolina Public Service Authority will price the week of Feb. 10 around $650 million of revenue refunding bonds.
In the competitive market, the Florida Board of Education (Aaa/AAA/AAA/) sold $241.035 million of public education capital outlay refunding bonds, 2025 Series A, to J.P. Morgan, with 5s of 6/2026 at 2.67%, 5s of 2031 at 2.83%, 5s of 2035 at 3.02% and 5s of 2036 at 3.07%, noncall.
Frederick County, Maryland, (Aaa/AAA/AAA/) sold $202.655 million of GO public facilities project bonds, Series 2025A, to BofA Securities, with 5s of 4/2026 at 2.73%, 5s of 2030 at 2.83%, 5s of 2035 at 3.06%, 4s of 2040 at 3.57%, 4s of 2045 at 4.01%, 3.875s of 2051 at 4.19% and 4s of 2055 at 4.20%, callable 4/1/2035.
The Highland Park Independent School District, Texas, sold $127.5 million of unlimited tax school building bonds, to Truist, with 5s of 2/2026 at 2.72%, 6s of 2030 at 2.92%, 5s of 2035 at 3.18%, 5s of 2040 at 3.50% and 4s of 2045 at 4.10%, callable 2/15/2035.
Fund flows
Investors added $741.7 million to municipal bond mutual funds in the week ending Wednesday, following $2.078 billion of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $335 million compared to the previous week's inflows of $580.7 million.
Tax-exempt municipal money market funds saw outflows of $803.3 million for the week ending Jan. 21, bringing total assets to $134.23 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 rose to 2.28%.
Taxable money-fund assets saw $5.74 billion exit.
The average seven-day simple yield was at 4.05%.
The SIFMA Swap Index fell to 2.25% Wednesday compared to the previous week's 2.96%.
AAA scales
MMD's scale was bumped up to three basis points: The one-year was at 2.65% (-2) and 2.67% (-2) in two years. The five-year was at 2.77% (-2), the 10-year at 2.97% (-3) and the 30-year at 3.97% (unch) at 3 p.m.
The ICE AAA yield curve was bumped one to five basis points: 2.67% (-4) in 2026 and 2.67% (-4) in 2027. The five-year was at 2.75% (-4), the 10-year was at 2.98% (-3) and the 30-year was at 3.89% (-1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped up to a basis point in spots: The one-year was at 2.69% (unch) in 2025 and 2.71% (-1) in 2026. The five-year was at 2.78% (-1), the 10-year was at 3.00% (-1) and the 30-year yield was at 3.87% (unch) at 4 p.m.
Bloomberg BVAL was bumped one to two basis points: 2.63% (-2) in 2025 and 2.69% (-2) in 2026. The five-year at 2.80% (-2), the 10-year at 3.04% (-2) and the 30-year at 3.90% (-1) at 4 p.m.
Treasuries were little changed.
The two-year UST was yielding 4.209% (-1), the three-year was at 4.251% (flat), the five-year at 4.330% (flat), the 10-year at 4.529% (flat), the 20-year at 4.824% (-1) and the 30-year at 4.775% (flat) near the close.
FOMC redux
Analysts continued opining on the Federal Open Market Committee meeting and disagree about how many rate cuts to expect this year, with one holding out the possibility of rate increases.
"The Fed[eral Reserve]'s interest rate policy in 2025 will depend critically on the federal government's tariff and tax policies and how those policies impact inflation and the labor market," said Ryan Swift, U.S. Bond Strategist at BCA Research.
As such, fiscal policy moves will drive bond yields more than Fed actions, he said.
"With so much uncertainty surrounding the potential economic impacts of tariffs and other fiscal policy changes, we see the Fed's interest rate policy being very reactive to the incoming inflation and labor market data," Swift said.
BCA expects more than 50 basis points of rate cuts this year.
Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors, also sees at least three cuts this year, "as we forecast that core [personal consumption expenditures] is going to roll down significantly to the 2.4% range after the first quarter data is out as we are rolling off very high prints in the first quarter of 2024."
But Fed Chair Jerome "Powell is keeping his options open, with a wide range of outcomes possible" amid political policy uncertainty, according to the BNP Paribas Markets 360 team. They see "little downside to waiting."
The Fed will remain on hold indefinitely, BNP said, "as it awaits further clarity on tariffs, foresees U.S. economic resilience and awaits further progress on inflation."
"Not only can the Fed wait for further progress on inflation before they cut rates again, but they can assess the potential economic impacts of the new administration's policies on tariffs, immigration, and taxes before they move again," said JoAnne Bianco, partner and investment strategist at Bondbloxx.
The Fed, she expects, will stay on hold for the "foreseeable future."
While the Fed has reason to pause — for now — the Payden economics team doesn't "view January's rate pause as the end of the cutting cycle. It's likely overnight rates will be quite a bit lower in a year's time as inflation moderates to target and/or the labor market continues to soften."
Christian Chan, chief investment officer at AssetMark, said, "The statement is pretty balanced, despite some saying it leans hawkish because it removed the phrase about inflation making progress."
The rate cuts could be over, he said. "I was fascinated by Powell's one-sided rate change comment," Chan added. "If inflation does not come down, they may hold at today's level. If growth stumbles, they could cut. There was no mention of what it would take to hike rates."
But Lauren Saidel-Baker, an economist with ITR Economics, thinks rate hikes are possible. "I forecast that inflation will rebound in the latter half of 2025 and beyond, driven by underlying fundamental drivers."
Tariffs and other policies that may be inflationary pose "an upside risk to even higher inflation," she said. "Although the level of inflation will not likely exceed the highs of the most recent cycle, the resurgence of inflation this year will limit the Fed's ability to continue the rate-cutting cycle far into 2025" and possibly result in "rate hikes before the end of the year."
The Fed's decision to hold rates "is likely to represent the beginning of a pause that could last into the summer," said Josh Jamner, investment strategy analyst at ClearBridge Investments.
While the Fed characterizes rates as "restrictive," Paul Mielczarski, head of global macro strategy at Brandywine Global, said, "the continued resilience of the U.S. economy and easy financial conditions raise questions about whether monetary policy is, in fact, restrictive."
"Notably, there was no mention of tariffs, immigration, tax cuts, or the Trump administration," noted Thomas Urano, co-chief investment officer at Sage Advisory. "On balance, this Fed meeting leans hawkish with a positive view on employment and a cautious take on inflation."
Gary Siegel contributed to this story.
