Municipals were weaker Thursday, with the largest cuts out long, while U.S. Treasuries were mixed and equities sold off.
Muni yields were cut up to nine basis points, depending on the scale, while UST yields were narrowly mixed — small bumps five years and in and small cuts out long.
The market has been plagued by uncertainty for the past several months, said Cooper Howard, a fixed-income strategist at Charles Schwab.
"That's starting to flow through into what we're seeing in the Treasury market, and therefore what's happening in the municipal market," he said.
There are a number of different policies coming out of Washington and inquiries circling from market participants, including questions about tariffs, he said.
"Markets fixate on one risk at a time, and there's no shortage right now. Volatility has spiked, liquidity is thin, and buyers are sidelined — but that's temporary," said James Pruskowski, chief investment officer at 16Rock Asset Management.
Friday's jobs report, reinvestment demand and continued inflows should "hit fast," he said.
"Supply this year looks front-loaded on lower rates and policy uncertainty, setting up a strong backdrop for the right trades here," Pruskowski said.
"The market is pricing policy risk with precision — GARVEE, private universities, and federal lease-backed bonds stand out," he said.
Meanwhile, Pruskowski noted, "weaker credits will stay under pressure, facing rating risk and structural headwinds."
Elsewhere, absolute yields for munis "remain attractive," Howard said, noting that while they are below their mid-January highs, opportunities still exist in the muni market.
The tax-equivalent yield is above 7% for investors in a high-tax state and more than 70% of the issuers in the Bloomberg muni index are either AAA/Aaa or AA/Aa rated, he said.
While "we're likely past the peak in credit quality, we expect credit quality to remain resilient in the near-term," Howard said.
Yields relative to USTs are likely to remain range-bound, he said.
The two-year municipal to UST ratio Thursday was at 64%, the five-year at 67%, the 10-year at 69% and the 30-year at 88%, according to Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 64%, the five-year at 65%, the 10-year at 68% and the 30-year at 85% at 4 p.m.
The 10-year muni-UST ratio has "fluctuated near the upper 60s over the past year and is unlikely to break out one way or the other unless there's a significant shift in issuance or demand — neither of which we expect to substantially change soon," he said.
Munis may struggle in the near-term, he said, noting in March high net worth investors sell munis to help pay their tax bill in April.
Historically, March has been a "difficult month" for total returns, Howard said.
The median monthly return for March since 1980 is only 0.03%, the lowest for any month, he said.
Additionally, munis have only seen positive returns in March around half of the time since 1980, suggesting that it's not only a few instances that pulled the median down.
Fund flows
Investors added $872.2 million to municipal bond mutual funds in the week ending Wednesday, following $796.4 million of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $681.8 million compared to the previous week's inflows of $429.7 million.
Tax-exempt municipal money market funds saw outflows of $1.5 billion for the week ending Feb. 25, bringing total assets to $133.61 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds fell to 1.80%.
Taxable money-fund assets saw $136.74 billion added.
The average seven-day simple yield was at 4.03%.
The SIFMA Swap Index rose to 2.25% Wednesday compared to the previous week's 1.86%.
AAA scales
MMD's scale was cut up to nine basis points: The one-year was at 2.54% (unch) and 2.56% (+2) in two years. The five-year was at 2.71% (+8), the 10-year at 2.96% (+9) and the 30-year at 4.05% (+9) at 3 p.m.
The ICE AAA yield curve was cut one to five basis points: 2.56% (+1) in 2026 and 2.57% (+1) in 2027. The five-year was at 2.67% (+4), the 10-year was at 2.92% (+4) and the 30-year was at 3.90% (+4) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut up to nine basis points: The one-year was at 2.58% (unch) in 2025 and 2.59% (+1) in 2026. The five-year was at 2.68% (+4), the 10-year was at 2.96% (+9) and the 30-year yield was at 3.95% (+9) at 4 p.m.
Bloomberg BVAL was cut one to nine basis points: 2.49% (+1) in 2025 and 2.56% (+2) in 2026. The five-year at 2.68% (+6), the 10-year at 2.94% (+8) and the 30-year at 3.96% (+9) at 4 p.m.
Treasuries were mixed.
The two-year UST was yielding 3.960% (-4), the three-year was at 3.97% (-3), the five-year at 4.057% (-2), the 10-year at 4.284% (flat), the 20-year at 4.624% (+2) and the 30-year at 4.584% (+1) near the close.
Primary market on Wednesday
RBC Capital Markets priced for institutions the Regents of the University of California's (Aa2/AA/AA/) $1.202 billion general revenue bonds, with small cuts out long from Tuesday's retail pricing. The first tranche, $325.535 million of Series CB, saw 5s of 5/2029 at 2.51% (-2), 5s of 2030 at 2.55% (unch), 5s of 2036 at 3.00% (+4) and 5s of 2040 at 3.32% (+2), callable 5/15/2035.
The second tranche, $876.005 million of Series CC, saw 5s of 5/2029 at 2.51% (-2), 5s of 2030 at 2.55% (unch), 5s of 2035 at 2.88% (unch), 5s of 2040 at 3.32% (+2), 5s of 2045 at 3.81% (+2), 4s of 2047 at 4.10% (+2), 5s of 2047 at 3.95%, 4s of 2055 at 4.18% (+3) and 5.25s of 2055 at 4.03%, callable 5/15/2035.
New HY ETF
Macquarie Asset Management has launched a new high-yield exchange-traded fund, the Macquarie National High-Yield Municipal Bond ETF, according to a press release.
This ETF — the firm's second actively managed muni ETF — plans to "maximize return with an income-driven, risk-controlled approach and a research-driven investment process," the release said.
"We believe high-yield municipal bonds can provide investors with a reliable source of tax-advantaged income, and active management is essential to finding opportunities in the over $4 trillion municipal bond market," Gregory Gizzi, head of U.S. fixed income and head of municipal bonds at Macquarie Asset Management, said in a statement. "HTAX leverages our yield-focused philosophy, which is grounded in deep, bottom-up research and backed by a dedicated team of research analysts."
"Today's launch marks an exciting expansion of our active ETF lineup," Anthony Caruso, head of ETF strategy at Macquarie, said in a statement. "Offering investors access to our flagship high-yield municipal bond strategy within the convenience of an ETF underscores our commitment to delivering exceptional service to our clients."
