Municipals were slightly stronger as U.S. Treasury yields fell and equities ended down.
Muni yields were bumped up to four basis points, depending on the scale, while UST yields fell five to nine basis points with the biggest gains 10 years and in.
The two-year municipal to UST ratio Monday was at 66%, the five-year at 66%, the 10-year at 67% and the 30-year at 82%, according to Municipal Market Data's 1 p.m. EST read. ICE Data Services had the two-year at 65%, the five-year at 64%, the 10-year at 66% and the 30-year at 80% at 4 p.m.
Municipals underperformed the moves in USTs Monday, but have outperformed their taxable counterparts on the year, with munis returning +0.73% in 2024 versus USTs at +0.23% year-to-date.
For next year, Barclays strategist Mikhail Foux said "rate path is always important," noting that investment-grade indices came into 2024 at extremely rich levels, "having pretty much no cushion."
As USTs sold off in December, IG returns suffered, with year-to-date returns pushed lower, he noted.
Munis are seeing losses of -1.77% in December with +0.73% returns year-to-date. High-yield is seeing losses of -1.97% this month but returning 5.98% in 2024.
However, year-end IG returns will still end up in positive territory, helped by carry, Foux said.
High-yield spread over USTs was "wide enough, helping the index to easily absorb rate volatility and still generate attractive returns," he said.
Both indices will likely end this year richer versus USTs and their benchmarks, "leaving very little cushion to absorb rate volatility," Foux said.
Additionally, heavy issuance, continued lack of demand from institutional investors and policy risks may make next year's tax-exempt performance more challenging, he said.
Tailwinds for next year include elevated and still attractive yields, said Jeremy Holtz, a portfolio manager at Income Research + Management.
Since the first rate cut in September, yields are higher, and investors find them very attractive as they focus more on yield than spread compensation at times, he said.
The overall level of yields will be a catalyst for increased demand, Holtz said.
The biggest headwinds for next year will be supply and the threat to the tax exemption.
For the former, next year will see a lot of supply, which is
A few believe issuance will exceed $500 billion, primarily because some issuers may flood the market to get ahead of any changes to the tax exemption as the new Congress seeks to pay for the $4 trillion needed to replace the expiring Tax Cuts and Jobs Act.
The drivers behind the surge in supply include the need for updated infrastructure across the country and dwindling pandemic relief funds, most of which has been exhausted, according to Holtz.
There's also a new administration, and
"The market is thinking about that a lot," Holtz said. "That could have a significant impact on supply, on demand. There's a lot of unknowns. There's a lot of different scenarios and ways it can go, but the market agrees that regardless of what the Trump administration ultimately does, we're still going to get a lot of supply in 2025."
However, he said if supply exceeds $500 billion during periods of stress, the market may be a little overwhelmed with issuance.
Enormous demand for tax-exempt munis exists, but there hasn't been enough supply, potentially leading to some heavy consecutive weeks or months of an influx of issuance, Holtz said.
For the latter, President-elect Donald Trump has not been afraid to target the muni market as seen with the Tax Cuts and Jobs Act in 2017 when he removed advanced refundings, he said.
"Before that happened, market participants didn't think it would," Holtz said. "It's such a small increase in federal revenue on paper relative to the size of the ongoing annual federal budget deficits that market participants didn't think that that would be the case, but [Trump] did, and that's why everyone's taking this threat of the tax exemption very seriously."
It's unclear if it will be a full removal of the tax exemption or a more targeted approach aimed at healthcare, higher education, and some corporate-backed tax-exempt munis, he noted.
"I wouldn't be surprised for the first three to five months if we see a little bit of a rollercoaster as the market tries to digest or figure out what the Trump administration will do with the tax exemption," Holtz said.
AAA scales
MMD's scale was bumped up to two basis points: The one-year was at 2.86% (unch) and 2.82% (unch) in two years. The five-year was at 2.87% (unch), the 10-year at 3.06% (-2) and the 30-year at 3.90% (-2) at 3 p.m.
The ICE AAA yield curve was bumped up to three basis points: 2.90% (unch) in 2025 and 2.84% (unch) in 2026. The five-year was at 2.85% (-3), the 10-year was at 3.06% (-2) and the 30-year was at 3.85% (-2) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped one to two basis points: The one-year was at 2.87% (-1) in 2025 and 2.80% (-1) in 2026. The five-year was at 2.86% (-1), the 10-year was at 3.06% (-1) and the 30-year yield was at 3.85% (-1) at 4 p.m.
Bloomberg BVAL was bumped one to two basis points: 2.96% (-1) in 2025 and 2.82% (-1) in 2026. The five-year at 2.89% (-1), the 10-year at 3.13% (-2) and the 30-year at 3.84% (-2) at 4 p.m.
Treasuries saw gains.
The two-year UST was yielding 4.255% (-7), the three-year was at 4.281% (-8), the five-year at 4.37% (-9), the 10-year at 4.543% (-8), the 20-year at 4.842% (-6) and the 30-year at 4.763% (-5) at 4 p.m.
