Municipals were firmer Monday as market participants brace for likely volatility due to the dueling events of the election and the Federal Open Market Committee rates decision. U.S. Treasury yields fell, with the greatest gains out long, and equities were down near the close.
The two-year municipal to UST ratio Monday 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 82% at 3:30 p.m.
The final countdown to Tuesday has begun, and investors await the reverberations in the muni market, said Daryl Clements, a municipal portfolio manager at AllianceBernstein.
Investors should "brace themselves" for further volatility, as uncertainty is likely to remain, said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.
By Wednesday, at the earliest, the market may "awaken to a vastly different political and economic landscape" following the outcome of the election, he said.
A red wave would "likely result in a knee-jerk reaction of both yields and inflation expectations, with both moving higher," Clements said.
"The same could be said of a blue-wave scenario, but is likely less, as a blue wave probably means higher taxes offsetting a portion of expected spending initiatives," he noted.
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Regardless of what happens, he expects yields to move lower over time.
Adding to the election uncertainty is the upcoming FOMC meeting, where the Fed will announce the next steps for the path of monetary policy, Kozlik said.
Following its 50-basis-point rate cut in September, it's possible "the Fed may lower its target rate again, but it could also decide to pause (very small chance of a pause)," he said.
Last week's data releases came in weaker than expected, he said.
The initial estimate for third-quarter GDP on Wednesday was at +2.8%, slightly below expectations, while the jobs report on Friday "reignited concerns about the labor market with an increase of only +12,000 reported, significantly below the +112,000 median forecast," Kozlik said.
"The Fed will remain data-dependent through this process, and we should not expect a different approach this week," he said.
Yields, performance and supply
Munis were "a bit more balanced [last week] as accounts began dipping their toes back into the market amidst more attractive absolute and relative yield levels," said Birch Creek strategists.
"Strong" two-way flows were reported by deals, some noting this was the largest volume of activity they have traded in months, they said.
"Sellers were far more realistic than they have been in the past as they've come to the realization that between the election uncertainty and various holiday weeks, liquidity is likely to be thin for the remainder of the year," Birch Creek strategists said.
Bid wanted rose 34%, with the heaviest volumes 10 years and out up nearly 50% compared to recent averages, they noted.
Conversely, "as the new higher yield levels set in, buyers sought to take advantage of both the dip and more eager sellers as customer purchases rose 16%," Birch Creek strategists said.
Investor demand remains "incredibly strong," Clements said, as LSEG Lipper reported
"While the muni market will take its cues from the treasury market, the technical picture is turning far more favorable in the months ahead," Birch Creek strategists said.
As market participants wait for the election results, it will be a "very quiet week" in the primary market, said Pat Luby, head of municipal strategy at CreditSights, as issuance falls after six consecutive weeks of above-average volume.
Despite this, a large deal snuck onto the new-issue calendar at the last minute.
BofA Securities priced for the Texas Municipal Gas Acquisition and Supply Corp. V (A1///) $860.61 million of gas supply revenue bonds, with 5s of 1/2026 at 3.60%, 5s of 2029 at 3.49%, 5s of 2034 at 3.99% and 5s of 2055 with a mandatory tender date at 1/1/2034 at 4.07%, callable 7/1/2033.
With only one week without a Fed meeting or a holiday in November, issuance will fall to an estimated $20 billion to $25 billion, more than half of October's total of $56.6 billion, Birch Creek strategists said.
Net supply is expected to total negative $23 billion for November and December, meaning there will be $23 billion more in cash to invest than in bonds to buy, Clements said.
"Couple insatiable demand with a depletion of new-issue supply, and the technical picture transitions from a headwind to a tailwind," he said.
"Munis are poised to perform well for the next couple of months, with Index yields up 32 bps to 3.66%; investors should take advantage, as overall yields are expected to be lower 12 months from now," Clements said.
AAA scales
Refinitiv MMD's scale was bumped four to five basis points: The one-year was at 2.80% (-5) and 2.64% (-5) in two years. The five-year was at 2.65% (-5), the 10-year at 2.97% (-5) and the 30-year at 3.83% (-4) at 3 p.m.
The ICE AAA yield curve was bumped four to five basis points: 2.91% (-4) in 2025 and 2.67% (-4) in 2026. The five-year was at 2.66% (-4), the 10-year was at 2.96% (-4) and the 30-year was at 3.74% (-4) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped three to five basis points: The one-year was at 2.87% (-3) in 2025 and 2.70% (-3) in 2026. The five-year was at 2.66% (-5), the 10-year was at 2.96% (-5) and the 30-year yield was at 3.75% (-5) at 4 p.m.
Bloomberg BVAL was bumped three to four basis points: 2.83% (-3) in 2025 and 2.63% (-4) in 2026. The five-year at 2.67% (-4), the 10-year at 2.98% (-4) and the 30-year at 3.77% (-4) at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 4.175% (-3), the three-year was at 4.146% (-4), the five-year at 4.168% (-6), the 10-year at 4.310% (-8), the 20-year at 4.608% (-9) and the 30-year at 4.495% (-9) at the close.
Primary to come
The Virginia Small Business Financing Authority (Aaa///) is set to price Thursday $125 million of Pure Salmon Virginia Project environmental facilities revenue bonds, serial 2052. HilltopSecurities.
Competitive
Fort Lauderdale (Aa1/AA+//) is set to sell $45.575 million of water and sewer revenue bonds, Series 2024A, at 11 a.m. Wednesday, and $81.38 million of water and sewer revenue refunding bonds, Series 2024B, at 11:15 a.m. Wednesday.
