Municipals rallied Friday, fully recovering the losses from Wednesday's selloff, as U.S. Treasury yields were mixed and equities ended up.
Triple-A yields fell nine to 15 basis points Friday, depending on the scale, as investors flooded back into the market after the post-election selloff and FOMC rate cut.
Those higher yields, which are attractive on a taxable equivalent basis in the very high-grade portions of the market, led buyers to step back in and take advantage to lock in yields Thursday and Friday in a way they hadn't in some time, said Justin Horowitz, a senior portfolio manager at Birch Creek Capital
"Some people fear that the market might snap back, kind of where things were a couple of weeks ago," so they want to take action before it's too late, Horowitz said.
As USTs yields rose on the short end and fell on the long end, municipal outperformance across the curve Friday moved valuations lower.
The two-year municipal to UST ratio was at 63%, the three-year at 62%, the five-year at 64%, the 10-year at 69% and the 30-year at 85%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 63%, the three-year at 62%, the five-year at 63%, the 10-year at 68% and the 30-year at 83% at 4 p.m.
Market participants may have also realized that politics may not play into the market right away at least, Horowitz said.
Following the Federal Open Market Committee's 25 basis point cut Thursday, Fed Chairman Jerome Powell signaled the Fed would not be "paying attention to the politics" and
Additionally, President-elect Donald Trump's economic policies will take a while to come to fruition after he assumes office, he said.
"Maybe we don't need to be as fearful of Trump's incoming fiscal policies at the moment," Horowitz said.
Despite Friday's moves, Trump's victory "capped off an across-the-board selling climax of bonds," said BofA strategists.
The fixed income markets selloff started in the middle of September following the first Fed rate cut, then accelerating after the month's strong economic data and concluding in a "blowoff selloff" on Wednesday, they said.
BofA strategists, however, believe that for the remainder of the year, both muni yields and muni-UST ratios should fall. "A sharply lower new-issuance calendar, peak yields, large redemption money and mutual funds inflows are all positive performance factors for the market," BofA strategists said.
In the short-term, BofA strategists said "the Fed's interpretation of the economy and the path of its rate cut cycle, in connection with the possible administrative and legislative policies, should drive the bond market."
In the long-term, they said, particularly by the second half of 2025, "the prospect of tariffs, deregulation and stimulus are causing BofA's economists and rates group to re-evaluate the impact on the economy, as well as the Fed rate easing cycle.
"While there is a good degree of uncertainty at this point, our take is that investors may need to expect slightly stronger economic growth and a relatively shallower Fed rate cut cycle," they said.
Lauren Saidel-Baker, an economist with ITR Economics, said inflation will increase next year and beyond.
"Although the level of inflation will not exceed the highs of the most recent cycle, the resurgence of inflation next year will likely limit the Fed's ability to continue the rate cutting cycle far into next year," she said.
BofA strategists said the market will likely need to wait until the first quarter of 2025 and beyond to see the "impact of possible tariffs, deregulation and stimulus that were promised during the campaign."
New-issue calendar
Issuance for next week rises to $5.962 billion, with $4.562 billion of negotiated deals and $1.4 billion of competitive ones on tap.
The negotiated calendar is led by $1 billion of gas project revenue bonds from the Black Belt Energy District and the Los Angeles Department of Water and Power's $448.71 million of power system revenue refunding bonds.
The Allen County Building Corp. leads the competitive calendar with $203 million of ad valorem property tax back-up lease rental revenue bonds.
AAA scales
Refinitiv MMD's scale was bumped 10 to 14 basis points: The one-year was at 2.83% (-10) and 2.67% (-10) in two years. The five-year was at 2.68% (-10), the 10-year at 2.96% (-12) and the 30-year at 3.79% (-14) at 3 p.m.
The ICE AAA yield curve was bumped nine to 14 basis points: 2.89%% (-9) in 2025 and 2.66% (-10) in 2026. The five-year was at 2.65% (-12), the 10-year was at 2.93% (-14) and the 30-year was at 3.76% (-9) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped 10 to 13 basis points: The one-year was at 2.86% (-10) in 2025 and 2.68% (-10) in 2026. The five-year was at 2.62% (-13), the 10-year was at 2.92% (-13) and the 30-year yield was at 3.71% (-13) at 4 p.m.
Bloomberg BVAL was bumped 10 to 15 basis points: 2.83% (-10) in 2025 and 2.64% (-10) in 2026. The five-year at 2.68% (-10), the 10-year at 2.97% (-11) and the 30-year at 3.71% (-14) at 4 p.m.
Treasuries were mixed.
The two-year UST was yielding 4.255% (+6), the three-year was at 4.202% (+5), the five-year at 4.192% (+2), the 10-year at 4.302% (-3), the 20-year at 4.577% (-6) and the 30-year at 4.465% (-7) at the close.
FOMC redux
Federal Reserve Board Chair Jerome Powell's press conference was "neutral," according to Neil Sun, BlueBay portfolio manager at RBC Global Asset Management, and "resulted in a rally in rates that brought yields down to the lowest levels of the day."
Getting monetary policy normalized will take at least through mid-2025, he said. "Policy rates are still in restrictive territory and there's still some more runway before we hit a neutral rate stance."
Expecting another quarter-point move in December and a full point reduction next year, Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, said, "We recommend investors shift excess cash into quality fixed income, especially as the recent increase in yields offers an opportunity to lock in attractive levels. Investors can also consider diversified fixed income strategies as a way of enhancing portfolio income."
While they expect another quarter-point reduction in December, the Payden Economics team sees rate cuts coming once a quarter next year, although they doubt Trump's "fiscal plans will fan inflation flames, at least in the short term."
They estimate neutral between 3% and 3.5%. "Solid economic data may slow the descent," they said, while "a more dire economic slowdown would warrant a quicker cutting cycle, which we do not yet foresee."
December should provide more easing, with "perhaps a few more" cuts next year, said DWS U.S. Economist Christian Scherrmann. "We think there may be fewer cuts in the pipeline over the medium-term than we expected a few weeks ago. The Fed no longer seems to be in a hurry to lower rates toward neutral, as Powell puts it."
But dissent remains. "Another 25-bps rate cut in December is not a lock," said Ryan Swift, U.S. bond strategist at BCA Research. "Back in September, 10 FOMC participants expected to cut rates by another 50 bps or more by the end of 2024, but nine participants expected to cut rates by 25 bps or less. Since then, we've seen both inflation and employment come in a little hotter than expected."
Inflation appears higher than the Fed's forecast, while the unemployment rate is on track to be lower than expected, he said. "There is still a lot of data between now and the December FOMC meeting, and that will likely tip the scales in one direction or the other. But, for now, we view the odds of another rate cut in December as 50/50."
The latest dot plot suggested a December rate cut, BMO Senior Economist Sal Guatieri said. "We still lean in this direction too, but much will come down to the next set of inflation and job reports, and perhaps some cooling in overall economic growth."
Looking at how election results will impact Fed thinking, Wells Fargo Securities Chief Economist Jay Bryson said, "The FOMC will not react to potential policy changes that could be implemented by the incoming Trump administration until those policies are more fully formed."
But, should "tariffs or other fiscal policies" lead to a spike in inflation next year, "then we believe the nominal fed funds rate would not fall all the way toward 3%, as we had forecast prior to the election."
Primary to come
The Black Belt Energy Gas District (A1///) is set to price Wednesday $1 billion of gas project revenue bonds. Goldman Sachs.
The California Public Finance Authority is set to price next week $455.105 million of The James senior living revenue bonds, consisting of $441.405 million of Series 2024A, $13.7 million of Series 2024B. HJ Sims.
The Los Angeles Department of Water and Power (Aa2/AA-//AA) is set to price Thursday $448.71 million of power system revenue refunding bonds, serials 2028-2036, 2039, 2048, 2054. Wells Fargo.
The Los Angeles Community College District (Aaa/AA+//) is set to price Thursday $300 million of general obligation bonds. Goldman Sachs.
The Prosper Independent School District, Texas, (Aaa//AAA/) is set to price $250 million of unlimited tax school building bonds, PSF guarantee. Piper Sandler.
The Minnesota Housing Finance Agency (Aa1/AA+//) is set to price Tuesday $250 million of social bonds residential housing finance bonds, consisting of $19 million of AMT bonds, Series 2024T; $77.15 million of non-AMT bonds, Series 2024U; $93.85 million of taxables, Series 2024V; and $60 million of taxables, 2024 Series W. RBC Capital Markets.
The Maryland Department of Transportation (A1//A+/) is set to price Thursday $223.94 million of Baltimore/Washington International Thurgood Marshall Airport AMT special transportation project revenue bonds. J.P. Morgan.
The Virginia Housing Development Authority (Aa1/AA+//) is set to price Wednesday $164.175 million of rental housing bonds, non-AMT, serials 2027-2036, terms 2039, 2044, 2049, 2054, 2059, 2066. BofA Securities.
The Massachusetts Housing Finance Agency (Aa2/AA+//) is set to price $160.26 million of non-AMT sustainability housing bonds, consisting of $42.285 million of Series B-1, serials 2028-2037, terms 2039, 2044, 2049 2054, 2059, 2064, 2067, and $116.975 million of Series B-3, serials 2027-2029. RBC Capital Markets.
The EP Essential Housing WF PFC (/A+//) is set to price Wednesday $145.925 million of residential development revenue bonds HOME Essential Function Housing Program (Retreat at Mesa Hills Project), serials 2034. KeyBanc Capital Markets.
The New York Metropolitan Transportation Authority (Aa1/AA/AAA/) is set to price Tuesday $135.55 million of transportation revenue variable-rate bonds, consisting of $65.9 million of Series 05D-2, terms 2035, and $69.65 million of Series 12G-4, term 2030. BofA Securities.
The Public Finance Authority is set to price Wednesday $124.835 million of Million Air Three LLC General Aviation Facilities Project special facility revenue refunding bonds, consisting of $47.485 million of Series 2024A tax-exempt refunding AMT, terms 2030, 2035, 2046; and $77.35 million of taxable refunding Series 2024B, terms 2035, 2054. Raymond James.
The Pasadena Public Financing Authority (/AA+//) is set to price Wednesday $106.349 million of Rose Bowl Renovation Project lease revenue refunding bonds consisting of $58.525 million of Series CIB, serials 2025-2039, and $115.395 million of Series CABs, serials 2039-2048. Stifel, Nicolaus & Co.
Competitive
The Allen County Building Corp., Indiana, (Aa2///) is set to sell $202.67 million of ad valorem property tax back-up lease rental revenue bonds at 11 a.m. eastern Wednesday.
King County, Washington, (Aaa/AAA/AAA/) is set to sell $103.9 million of unlimited tax general obligation bonds at 10:45 a.m. eastern Wednesday.
Gary Siegel contributed to this story.
