Municipals sold off Wednesday, with the largest losses out long, as the asset class continues to feel pressure from heavy issuance. U.S. Treasuries were slightly weaker and equities ended up following a lower-than-expected gain in the consumer priced index report.
Rising muni yields pushed muni-UST ratios higher. The two-year municipal to UST ratio Tuesday was at 65%, the five-year at 68%, the 10-year at 71% and the 30-year at 90%, according to Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 66% the five-year at 68%, the 10-year at 72% and the 30-year at 90% at 4 p.m.
"What is most surprising this morning is that the bond market [was weaker]," said John Kerschner, head of U.S. securitised products and portfolio manager at Janus Henderson, in regard to the CPI report. "This is most likely a correction to the large rally in bonds (rates going down) since the end of February bringing the 10yr UST down about 20 basis points."
While inflation is trending downward, the pace is slower than the Federal Reserve would like, he said.
"We believe that volatility in markets will continue apace given the daily pronouncements on tariffs coming out of the White House," Kerschner added.
Munis have struggled this week, said Cooper Howard, a fixed income strategist at Charles Schwab.
"The supply/demand dynamic is a headwind for the muni market this week as supply is expected to be elevated," he said. "Additionally, munis tend to struggle in March as many high-net-worth investors liquidate their positions to satisfy their tax bills."
Monday saw large moves for USTs that munis did not really follow, as it "didn't feel like there was a good cash bid out there," said Chris Eustance, a portfolio manager at Morgan Stanley Investment Management.
"Evaluations maybe changed sympathetically one or two basis points lower in yields [Tuesday]," he said. "Rates were off, and while munis didn't move that much, it felt like a weaker overall tone."
And then Wednesday saw muni yields cut three to 20 basis points, depending on the curve, with yields cut double-digits out long.
"You get those days sometimes when the market needs a 10 or 15 basis point adjustment, and that's what we're starting to see," Eustance said.
Some trades "out of the gate" this morning started to reprice the market somewhat a little bit, he noted.
The market has headed into a weaker technical period with less capital reinvestment coming in and more issuance in the market, where for the latter, there are deals that "just subscribed for" or struggling compared to January and February when deals were five to 10 times oversubscribed, according to Eustance.
Some buyers that haven't been in the market more recently "pop their heads up" because munis are starting to look cheaper on a crossover relative to USTs and corporates, even when factoring in the lower corporate tax rate, he said.
"It's been a tougher time for trading overall given the volatility that we've seen," Eustance said.
However, fund flows remain supportive for the market, he said.
The Investment Company Institute reported inflows of $419 million for the week ending March 5, following $1.337 billion of inflows the previous week.
Exchange-traded funds saw inflows of $370 million after $1.062 billion of inflows the week prior, per ICI data.
If fund flows turn negative, there will be continued weakness to the point where ratios keep backing up to 90% or even higher.
In the primary market Wednesday, Wells Fargo priced and repriced for institutions New York City Transitional Finance Authority's (Aa1/AAA/AAA/) $1.5 billion of future tax secured tax-exempt subordinate bonds, Fiscal 2025 Series H, Subseries H-1, with yields bumped up to six from Wednesday's preliminary pricing: 5s of 11/2026 at 2.75% (unch), 5s of 2030 at 2.98% (-5), 5s of 2035 at 3.37% (-6), 5s of 2040 at 3.86% (unch), 5.25s of 2045 at 4.27% (-5), 5s of 2050 at 4.51% (-4) and 4.5s of 2052 at 4.662% (unch), callable 5/1/2035.
AAA scales
MMD's scale was cut five to 12 basis points: The one-year was at 2.57% (+5) and 2.58% (+5) in two years. The five-year was at 2.76% (+7), the 10-year at 3.08% (+12) and the 30-year at 4.19% (+12) at 3 p.m.
The ICE AAA yield curve was cut three to 10 basis points: 2.62% (+3) in 2026 and 2.59% (+3) in 2027. The five-year was at 2.76% (+7), the 10-year was at 3.07% (+10) and the 30-year was at 4.15% (+5) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut four to 20 basis points: The one-year was at 2.60% (+4) in 2025 and 2.61% (+4) in 2026. The five-year was at 2.73% (+7), the 10-year was at 3.08% (+12) and the 30-year yield was at 4.14% (+20) at 4 p.m.
Bloomberg BVAL was cut four to 16 basis points: 2.52% (+4) in 2025 and 2.59% (+4) in 2026. The five-year at 2.73% (+7), the 10-year at 3.03% (+10) and the 30-year at 4.14% (+16) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 3.998% (+4), the three-year was at 3.994% (+5), the five-year at 4.08% (+4), the 10-year at 4.317% (+4), the 20-year at 4.666% (+3) and the 30-year at 4.5633% (+4) near the close.
CPI
Despite fears that the consumer price index would come in above expectations, headline and core each rose 0.2% in February, less than forecast. On an annualized basis, core dropped to 3.1%, down from 3.8% a year ago and the lowest read since May 2021.
"The better-than-expected February CPI did not spark the bond market rally you might expect, as yields are higher along the entire coupon curve," said Chris Low, chief economist at FHN Financial.
Traders have eyes on trade wars, which "are expected to raise prices in future inflation reports," he said.
Still, the two most recent CPI reports reflect "a more benign-than-expected foundational price environment before tariffs were imposed," Low said. "The Fed is sidelined now by price uncertainty, but the odds they can cut again this year once the smoke from the tariff back-and-forth clears increased today nonetheless."
"Softer CPI is a boon for the Fed as it allays near-term concerns of tariff impact on prices," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
"The Fed's bias remains toward easing," she said, "and they will react if fundamentals deteriorate. For now, strength in job openings, a tight labor market and above-target inflation reaffirms the Fed pause. Bonds should retain their negative correlation to stocks in this environment."
The softer inflation data "may be coming at a fortuitous time," as stagflation is again being discussed, said Tony Welch, CIO of SignatureFD. "Investor sentiment has turned extremely pessimistic in recent weeks. It is possible that softer inflation can become the spark that the market needs to rally from oversold and pessimistic levels."
"We do not think the broad mosaic of economic data, nor the ongoing tariff uncertainty, signal an impending recession," said Jennifer Timmerman, investment strategist analyst at Wells Fargo Investment Institute. "Instead, we view the current equity-market pullback and bond-market rally as an opportunity to reallocate cash and position portfolios for a reacceleration of economic growth later this year."
But this may be the calm before the storm, said Seema Shah, chief global strategist at Principal Asset Management. "Not only does the Fed need to wait for tariff policy clarity, but once tariff implementation arrives, it is likely to bring at least some price increases, with the inflation picture potentially getting uglier as the months go on. The Fed — and markets — are not yet in the clear."
While this report was "a bit softer than expected and shows disinflation proceeding, Wells Fargo Securities senior economists Sarah House and Michael Pugliese and economist Nicole Cervi noted, "the year-ago pace of core CPI inflation is still about 75 bps above its February 2020 level, and the three-month annualized change in the core CPI is still an uncomfortably high 3.6%."
Additionally, looking deeper, they said, "details of the report suggest that the core PCE deflator may come in slightly higher than" expected.
Tariffs could "raise spot inflation and inflation expectations" while further weakening the labor market, they added. "This presents a challenging situation for the FOMC, and we expect the Committee to respond with a gradual pace of monetary policy easing later this year."
But Scott Anderson, chief U.S. economist and managing director at BMO Economics, disagreed.
"This was a well-behaved CPI inflation report that will raise expectations for an even tamer core PCE inflation print later this month," he said. "This will calm market fears that consumer inflation is meaningfully heating up again and getting away from the Fed's goal even before new tariffs on goods imports hit."
Still, Anderson doesn't expect a March rate cut, but there could be "more rate cuts later this year. Fed funds futures are now pricing in nearly three quarter-point rate cuts this year with the first one coming as soon as June."
Kay Haigh, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, agreed that a March cut is unlikely. However, "the combination of easing inflationary pressures and rising downside risks to growth suggest that the Fed is moving closer to continuing its easing cycle."
Primary to come
The Black Belt Energy Gas District (Baa1/NR/NR/NR/) is set to price $913.95 million of gas project revenue bonds, 2025 Series B. Goldman Sachs.
The Board of Regents of the University of Texas System (Aaa/AAA/AAA/) is set to price Thursday $650 million of permanent university fund bonds, Series 2025A. Jefferies.
Competitive
The Kansas Development Finance Authority is set to sell $167.15 million of tax-exempt and taxable athletics facilities revenue bonds, at 10:30 a.m. Thursday.
Mercer County, New Jersey, is set to sell $139.91 million of bond anticipation notes, Series 2025A, at 11 a.m. Thursday.
Gary Siegel contributed to this report.
