Munis were firmer Wednesday, underperforming a U.S. Treasury rally in most tenors, while equities ended up.
Muni yields were bumped one to eight basis points, depending on the scale, while UST yields fell three to 10 basis points, with the greatest gains out long.
Tariffs and trade negotiations have dominated the markets at the start of the week, but outside of that, the big economic event is Friday's labor market report, said Cooper Howard, a fixed income strategist at Charles Schwab.
The economy is expected to add 130,100 jobs and the unemployment rate will remain at 4.1, he said.
The change in nonfarm payrolls has been slowing, but the labor market continues to hold up, Howard said.
The two-year municipal to UST ratio Wednesday 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 62%, the 10-year at 64% and the 30-year at 81% at 4 p.m.
The Investment Company Institute reported inflows of $1.344 billion for the week ending Jan. 29, following $1.445 billion of inflows the previous week.
Exchange-traded funds saw inflows of $53 million after $2.038 billion of inflows the week prior, per ICI data.
December caught a lot of people "off guard" at the end of 2024, as there is usually at least "decent performance" for the month, leading up to the big seasonal reinvestment period in January and February, said David Grean, vice president, trader and strategist at Payden & Rygel.
"Rates and duration ruled the day there in December," he said. "So that was a bit atypical in terms of how things transpired to close out the year, especially relative to the last couple of years where we've had big rallies coming into the yearend."
Coming into 2025, there was monetary and fiscal policy uncertainty, which Grean believes will drive markets almost exclusively outside of some unforeseen event.
For the former, there was expected volatility around Fed funds, specifically the dots versus market expectations, and he does not see that changing, he noted.
And for the latter, the "big wildcard" was the surprise of a red sweep in the November election, and this year has seen some "bold claims" be made — even without specifics in some instances, Grean said.
The impact on munis "of that uncertainty surrounding policy given what has been proposed to date and talked about colloquially, we believe that the reaction to policy change will generally lead to an upside surprise in supply and perhaps waning demand, at least at the margin," he said.
One of the topics du jour of the year is the tax exemption and whether it will be eliminated.
Most strategists believe that will not happen, at least not fully.
"Despite the exemption being recently included in a menu of options for lawmakers to consider, we think the odds of repealing the exemption are still low," Howard said.
"The bottom line is that it would do more harm than good since it would curtail infrastructure investment and negatively impact the finances of many state and local governments," he said.
However, specific sectors may be at more risk than others, like private activity bonds and universities, Grean said.
"As the noise around that continues to grow, and if anything concrete is put out there in regards to that, you would see a pull forward of issuance
If specific sectors lose the ability to access tax-exempt financing, there will be a rush for those entities to come to market before yearend, he noted.
Another factor could be a resurgence in Build America Bond refundings, which happened en masse at the start of last year before slowing down, according to Grean.
BABs refundings may continue at this steady pace this year at a slower pace, if not pick up some speed, as the economics for many issuers make sense given high rates and full ratios, he said.
Additionally, if there is any word on a cut to the federal subsidy — of which there has been nothing yet — that may cause an increase in refinancing of some BABs, Grean said.
On the demand front, there may be policy changes for state and local tax, or SALT, deduction cap on federal income taxes, as a proposal has been floated to raise the SALT deduction to $100,000 from $10,000, he said.
That would be a slight negative for demand at the margin as the overall tax bill to the individual consumer would be ultimately reduced, but "not like a wholesale selloff type situation," he said.
Then there is the reduction of corporate tax cuts to a proposed 15% from 21% and the declining participation of banks and insurance companies in the market, both of which will contribute to demand being slightly decreased demand at the margin, he said.
In the primary market Wednesday, Morgan Stanley priced for the Florida Development Finance Corp. $985 million of non-rated Brightline Florida Passenger Rail Expansion Project revenue bonds, Series 2025A, with 8.25s of 7/2057 with a mandatory tender date of 8/13/2025 at par.
J.P. Morgan priced for the Tarrant County Cultural Education Facilities Finance Corp., Texas, (Aa2/AA//) $373.48 million of Cook Children's Medical Center hospital revenue bonds, with 5s of 12/2027 at 2.74%, 5s of 2030 at 2.91%, 5s of 2035 at 3.20%, 5s of 2040 at 3.56%, 5s of 2045 at 4.01%, 5.25s of 2049 at 4.10% and 4.125s of 2054 at 4.37%, callable 6/1/2035.
Wells Fargo priced for The North Carolina Housing Finance Agency (Aa1/AA+//) $299.05 million of home ownership revenue bonds. The first tranche, consisting of $92.55 million of Series 57A non-AMT bonds, saw 6.25s of 1/2056 at 3.74%, callable 7/1/2033.
The second tranche, $206.5 million of Series 57-B taxables, saw all bonds price at par: 4.385s of 7/2026, 4.644s of 1/2030, 4.694s of 7/2030, 5.271s of 1/2035, 5.321s of 7/2035, 5.491s of 7/2040, 5.748s of 7/2045, 5.798s of 7/2050 and 5.848s of 1/2056, callable 7/1/2033.
J.P. Morgan priced for the Nebraska Investment Finance Authority (/AAA//) $110 million of social non-AMT single-family housing revenue bonds, Series 2025A, with all bonds priced at par: 2.95s of 9/2025, 3.3s of 3/2030, 3.35s of 9/2030, 3.8s of 3/2035, 3.85s of 9/2035, 4.15s of 9/2040, 4.5s of 9/2045, 4.6s of 9/2050 and 4.65s of 9/2055, callable 9/1/2033.
In the competitive market, Westchester County, New York, (Aa1/AAA/AAA/) sold $118.38 million of GO bonds to BNY Mellon, with 5s of 2/2026 at 2.43%, 5s of 2030 at 2.54%, 4s of 2035 at 2.75% and 4s of 2039 at 3.15%, callable 2/15/2033.
AAA scales
MMD's scale was bumped five to seven basis points: The one-year was at 2.58% (-5) and 2.60% (-5) in two years. The five-year was at 2.69% (-5), the 10-year at 2.89% (-6) and the 30-year at 3.90% (-5) at 3 p.m.
The ICE AAA yield curve was bumped one to eight basis points: 2.65% (-1) in 2026 and 2.62% (-4) in 2027. The five-year was at 2.69% (-6), the 10-year was at 2.91% (-7) and the 30-year was at 3.84% (-6) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped five basis points: The one-year was at 2.59% (-5) in 2025 and 2.61% (-5) in 2026. The five-year was at 2.68% (-5), the 10-year was at 2.91% (-5) and the 30-year yield was at 3.82% (-5) at 4 p.m.
Bloomberg BVAL was bumped five to seven basis points: 2.55% (-6) in 2025 and 2.61% (-6) in 2026. The five-year at 2.71% (-7), the 10-year at 2.95% (-7) and the 30-year at 3.84% (-5) at 4 p.m.
Treasuries rallied.
The two-year UST was yielding 4.184% (-3), the three-year was at 4.199% (-5), the five-year at 4.245% (-7), the 10-year at 4.425% (-9), the 20-year at 4.702% (-10) and the 30-year at 4.648% (-10) at 4 p.m.
Primary to come
The Dallas Independent School District (Aaa/NR/NR/AAA) is set to price Thursday $612.265 million of Series 2025B unlimited tax school building and refunding bonds and $163.785 million Series 2025C unlimited tax refunding bonds. The Series B bonds consist of serial bonds due 2026-2045 and term bonds due in 2050 and 2055. The Series C bonds consist of serial bonds maturing 2026-2034. The bonds are insured by the Permanent School Fund Guarantee Program. Ramirez.
The California Public Finance Authority is slated to sell $123.47 million of non-rated senior living rental housing revenue bonds, consisting of Series 2025A-1 senior lien bonds and Series 2025A-2 senior lien federally taxable bonds for Sunrise of Manhattan Beach. Goldman Sachs.
Competitive
The Washington Suburban Sanitary District, Maryland, (Aaa/AAA/AAA/) is slated to sell $315.95 million of GO bonds at 10:15 a.m. Thursday.
