Municipals were firmer Thursday, as U.S. Treasury yields rallied and equities ended up.
The two-year municipal to UST ratio Thursday was at 63%, the five-year at 64%, the 10-year at 67% and the 30-year at 86%, according to Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 61%, the five-year at 62%, the 10-year at 65% and the 30-year at 82% at 4 p.m.
"Everything for [munis] in 2025 begins and ends with Washington," said James Welch, a municipal portfolio manager at Principal Asset Management.
There are many potential negatives or positives that may come from President Donald Trump's tax policies and/or a "dramatic change" in monetary policy, he said.
However, the muni market has handled things well amid tariff and budget reconciliation announcements, Welch noted.
While munis have lagged other asset classes from a performance standpoint, fund flows into muni mutual funds remain good, he said.
Muni mutual funds have seen four consecutive weeks of inflows, with high-yield flows remaining a large percentage of the overall flows, according to LSEG Lipper.
Investors added $238.5 million to municipal bond mutual funds in the week ending Wednesday, following $1.124 billion of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $313 million compared to the previous week's inflows of $329.7 million.
Fund flows will remain elevated, as the market is on a "nice streak" since the end of 2023, Welch said.
Retail, "whether it's the funds directly, exchange-traded funds or separately managed accounts, will continue to be a strong voice as it relates to demand because we're seeing less federal money from the prior administration, issuance will remain elevated," he said.
Issuance stands at $50.74 billion year-to-date, up 12.5% year-over-year, according to LSEG.
Many issuers are contending with "deferred maintenance" and can no longer count on pandemic-era funding, which has dried up. This will prompt them to come to the muni market to fund projects that can no longer be put off, Welch said.
The market has been able to handle these sorts of macro events "really well" and digest what has been a "pretty healthy supply period" so far, he noted.
"Amidst an active yield curve, the steep slope past 10 years appears to be pulling in flows from cash products," said Kim Olsan, a senior fixed income portfolio manager at NewSquare Capital.
In the wake of a selloff in money fund products, the 7-day SIMFA rate "popped" 129 basis points to reset at 3.36%, she said.
After the January 1st call and maturity credits, money market demand surged, pushing balances to $139 billion. In response, the weekly floater rate fell from 3.01% to 1.95%, Olsan said.
Demand has "waned" in the ensuing weeks, as tax-exempt money market balances fell from $136 billion in mid-January to $134 billion at the end of the month, she said.
The weekly floater rate reached as high as 3.03% in January and ended the month at 2.40%, Olsan noted.
During February's first week, it was 2.16%, but it reset to 3.36% on Feb. 12, suggesting further waning demand, she said.
"A combination of the disinversion on the short end of the curve, 10-year area yields again above 3.00% and a curve extension worth about 100 basis points (from 2033 to 2045) all substantiate fewer defensive allocations," Olsan said.
MSRB data show only 5% of all tax-exempt secondary flows in the latest week happened inside 2026 maturities, she said.
Deals
In the primary market Thursday, Morgan Stanley priced for the Kentucky Public Energy Authority (A1/NR/NR/NR/) $1.209 billion of gas supply revenue refunding bonds, Series 2025A, with 5s of 12/2025 at 3.63%, 5s of 6/2029 at 3.91%, 5s of 12/2029 at 3.93% and 5.25s of 6/2055 with a mandatory tender date of 12/1/2029 at 4.00%, callable 9/1/2029.
Barclays priced for
The second tranche, $296.355 million of non-AMT Series 2025B bonds, saw 5s of 7/2036 at 3.35%, 5s of 2040 at 3.67%, 5s of 2045 at 4.18% and 5s of 2049 at 4.31%, callable 7/1/2035.
The third tranche, $167.165 million of AMT Series 2025C refunding bonds, saw 5s of 2040 at 4.17% and 5s of 2045 at 4.58%, callable 7/1/2035.
The fourth tranche, $54.9 million of non-AMT Series 2025D refunding bonds, saw 5s of 2040 at 3.74% and 5s of 2045 at 4.22%, callable 7/1/2035.
Stifel priced for the Tolleson Union High School District No. 214 (AAA/AA//) $115.65 million of Projects of 2023 and 2024 school improvement bonds, with 5s of 7/2026 at 2.80%, 5s of 2031 at 2.98%, 5s of 2035 at 3.27%, 5s of 2040 at 3.56% and 5s of 2041 at 3.65%, callable 7/1/2034.
In the competitive market, the Cherokee County School District, Georgia, (Aa1/AA//) sold $100 million of GOs to Jefferies, with 5s of 2/2026 at 2.70%, 5s of 2030 at 2.84% and 4s of 2035 at 3.21%, noncall.
AAA scales
MMD's scale was bumped two to four basis points: The one-year was at 2.68% (-2) and 2.70% (-2) in two years. The five-year was at 2.79% (-2), the 10-year at 3.05% (-2) and the 30-year at 4.05% (-4) at 3 p.m.
The ICE AAA yield curve was bumped one to four basis points: 2.70% (-1) in 2026 and 2.68% (-2) in 2027. The five-year was at 2.79% (-2), the 10-year was at 3.02% (-3) and the 30-year was at 3.96% (-4) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped two to three basis points: The one-year was at 2.71% (-2) in 2025 and 2.72% (-2) in 2026. The five-year was at 2.80% (-2), the 10-year was at 3.03% (-3) and the 30-year yield was at 3.97% (-3) at 4 p.m.
Bloomberg BVAL was bumped four to five basis points: 2.60% (-4) in 2025 and 2.67% (-4) in 2026. The five-year at 2.78% (-4), the 10-year at 3.02% (-4) and the 30-year at 3.97% (-5) at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 4.310% (-5), the three-year was at 4.327% (-6), the five-year at 4.390% (-8), the 10-year at 4.532% (-9), the 20-year at 4.796% (-10) and the 30-year at 4.737% (-10) at 4 p.m.
Muni bond trading in 2024
Muni bond trading activity continued to be "robust" last year with an average daily notional volume traded of $13.1 billion, nearly matching 2024 levels, but slightly down from 2022, said Kevin McPartland, head of market strategy and technology research at Coalition Greenwich.
The average daily trade count broke records in 2024 — up nearly 10% year-over-year — and was helped by the growth of SMAs and electronic trading adoption, McPartland said.
Muni SMAs rose 14% year-over-year to $1.6 trillion, per Bloomberg data, reversing a 5% year-over-year decline in 2023, he said.
"While
E-trading accounted for 18.4% of notional volume traded in 2024, up slightly from 17.7% in 2023, he said.
While yields "approaching forward-looking equity market returns" serve as the primary driver of investor demand, the electronification of the market has allowed SMAs to be adopted by the high-net-worth masses, McPartland said.
"E-trading and related technology has allowed fully automated management of these accounts in some cases, where portfolios can be rebalanced and the needed changes executed with little or no human intervention," he said. "This creates a high-value service for investors and a low cost of doing business for managers."
