Municipals rallied hard Thursday, undoing all of Wednesday's losses and then some, as the market took the 90-day tariff extension and the lower-than-expected consumer price index report in stride. Municipal bond mutual funds saw outflows hit $3.3 billion, the largest figure since June 2022 while exchange-traded funds saw the largest outflows since muni ETFs began reporting, analysts said.
While municipals recovered to an extent, U.S. Treasury yields rose out long and equities tumbled as tensions between the United States and China climbed.
Muni AAA scales saw yields fall 26 to 54 basis points, depending on the scale. The size of the bumps is in line with the size of the cuts from AAA scales on Wednesday.
The two-year ratio Thursday was at 77%, the five-year at 77%, the 10-year at 78% and the 30-year at 91%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 76%, the five-year at 77%, the 10-year at 79% and the 30-year at 94% at 4 p.m.
Wednesday was "a washout day — you're not going to see those yields for the rest of the year," said Michael Pietronico, CEO of Miller Tabak Asset Management. "You're going to continue to see price volatility, but I would suggest the worst is over."
There has been
The price action was helped Thursday by the release of a key economic indicator that showed inflation had eased in March, though it prove to be may be short-lived.
The consumer price index rose 2.4% year-over-year, below the expected 2.6% increase.
It was a "good thing" the CPI was lower than expected, only adding to help the momentum of the morning, Paris said.
"Unless it was going to be really a shocker to the upside, the muni market was ready to hold in some of the gains from yesterday and continue, but it was positive for the marketplace," he said.
Market participants have some concern over what the Treasury market will do the remainder of the week.
There may be a little bit of slowdown in activity, "just because people seem to be worried about the weekend and what can occur on the weekend," he noted.
Watch panelists discuss the market volatility at
Dealers have been somewhat more confident in showing bids Thursday after the first three days of the week, he said.
"There was pain on Monday, there was pain on Tuesday, and within a couple of hours yesterday, you saw an extension of that pain. But now you have this 90-day pause in place," Paris said. "People are feeling confident in at least transacting, whereas during parts of yesterday morning, people had really lost confidence in what they should be bidding for bonds, if they should be buying bonds, where they should be buying them.
"People now feel like their footing is a little bit more stable today, and we'll see if that carries on into tomorrow," Paris added.
If there is a "yield shock" over the next few days, then things may revert back, but not to the levels experienced at the start of the week, he noted.
Pietronico said the tariff debate will continue to make for a bumpy ride in the near term despite Trump's pause. "The discussion about policies regarding tariffs will drive performance in bonds over the next three to six months," he said. "I think the market is watching carefully any announcement coming from President Trump, but I would suggest the volatility will remain high in the market, but not the absolute yields we saw yesterday."
Even before the tariff-induced volatility, munis had been facing mild headwinds from historically high supply coupled with uncertainty around tax policy in Washington, D.C., said Tom Murphy, a senior analyst on Morningstar's fixed income team.
"There were inflows into munis in January and February," but the inflows had been tapering in March, "so we saw that demand taper even before the volatility," Murphy said.
Muni mutual funds have seen five consecutive weeks of outflows.
Investors pulled $3.302 billion from municipal bond mutual funds in the week ending Wednesday, following $243.8 million of outflows the prior week, according to LSEG Lipper data. The outflows were the highest since the volatile market conditions of June 2022.
"Outflows were led by open-end funds (-$1.9bn, the largest since Dec 2022) with ETF flows also markedly negative (-$1.4bn, the largest weekly outflow since the inception of municipal ETF reporting in 2006)," noted J.P. Morgan's Peter DeGroot. All categories observed outflows, with some concentration in terms of both duration (long-term at -$2.6bn) and credit quality (investment grade at -$2.5bn) intensify, he noted.
High-yield funds saw outflows of $759.2 million compared to the previous week's outflows of $94.9 million.
The SIFMA Swap Index surged to 4.41% on Wednesday compared to the previous week's 2.72%.
On Wednesday, rates on daily paper was raised in the 4.75%-5% range, but then by the end of the day, the inventories on daily paper had dropped by a little over 50%, said Rick White, an independent consultant.
Then dealers attempted to push rates lower to the 4.15%-4.50%, so anywhere to 30 to 50 basis points, and "they ended up getting back what these numbers were," and the daily increased by 72%, he said.
The amount of bonds that were sitting out there Wednesday before all the rates changed was between 8.5 and 9 billion; now it's between 9 and 10 billion, he said.
"There are more bonds out there. The inventories continue to build," according to White.
AAA scales
MMD's scale was bumped 45 to 48 basis points: The one-year was at 2.94% (-46) and 2.96% (-46) in two years. The five-year was at 3.11% (-48), the 10-year at 3.41% (-48) and the 30-year at 4.39% (-45) at 3 p.m.
The ICE AAA yield curve was bumped 26 to 30 basis points: 2.93% (-26) in 2026 and 2.96% (-29) in 2027. The five-year was at 3.08% (-30), the 10-year was at 3.41% (-30) and the 30-year was at 4.44% (-30) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumps upward of 50 basis points: The one-year was at 2.85% (-54) in 2025 and 2.86% (-54) in 2026. The five-year was at 3.04% (-52), the 10-year was at 3.34% (-54) and the 30-year yield was at 4.33% (-53) at 4 p.m.
Bloomberg BVAL was cut bumped 45 to 49 basis points: 2.74% (-47) in 2025 and 2.82% (-48) in 2026. The five-year at 2.99% (-49), the 10-year at 3.32% (-48) and the 30-year at 4.36% (-45) at 4 p.m.
Treasuries saw losses out long.
The two-year UST was yielding 3.844% (-7), the three-year was at 3.879% (-5), the five-year at 4.04% (-1), the 10-year at 4.405% (+7), the 20-year at 4.91% (+12) and the 30-year at 4.87% (+13) near the close.
Caitlin Devitt contributed to this story.
