Municipals were steady to slightly weaker in spots, while U.S. Treasury yields rose a little and equities ended down after the Federal Open Market Committee, as expected, held rates steady.
"Both the FOMC's December Summary of Economic Projections and current rate futures suggest 50 basis points of additional cuts in 2025," noted Lon Erickson, portfolio manager at Thornburg Investment Management.
The FOMC changed its statement to "no longer say further progress toward the Fed's 2% inflation target has been made, but rather, it now says inflation 'remains somewhat elevated,'" he said, noting it was unsurprising given Fed Chair Jerome Powell's comments last month and inflation prints over the last few months.
"Treasury rates increased a few basis points across the curve with a bit of a bear-flattening bias," due to the removal of wording on progress toward the 2% inflation goal, Erickson said.
"While the change in language seemed largely anticipated, it still gave investors a reason to sell a Treasury market where rates had fallen 15-25 basis points along the curve over the past two weeks," he said.
Even with the possibility of inflation and fiscal policy-induced headwinds, there is much to be optimistic about in the muni market, despite some possible near-term turbulence, said GW&K strategists.
The market enters this year with "solid fundamentals and a promising technical backdrop," they said.
State and local governments continue to be in strong financial shape, strengthened by healthy reserves and stable revenues, GW&K strategists noted.
Meanwhile, historically attractive yields and favorable supply/demand dynamics should provide additional support, they said.
The two-year municipal to UST ratio Wednesday was at 63%, the five-year at 64%, the 10-year at 66% and the 30-year at 83%, according to Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 64%, the five-year at 64%, the 10-year at 66% and the 30-year at 82% at 4 p.m.
The Investment Company Institute reported inflows of $1.445 billion for the week ending Jan. 22, following $153 million of inflows the previous week.
Exchange-traded funds saw inflows of $1.988 billion after outflows of $342 million of inflows the week prior, per ICI data.
The new-issue calendar slows the rest of the month, and with so little supply, it's unclear if January issuance will rise year-over-year.
Issuance got off to a slow start this year before ramping up and then slowing again. Issuance for this week was an estimated $5.2 billion, a drop from the previous week, as the Federal Open Market Committee meeting always slows that week's volume.
Despite the potential dip year-over-year in January, market strategists expect issuance around $500 billion or more, said Jeff Timlin, a managing partner at Sage Advisory.
A lower rate environment will positively influence the direction of supply as more issuers tap the capital markets, Timlin said.
Additionally, municipalities will need to borrow to fund infrastructure, especially in the wake of the devastating California wildfires, as the potential loss of federal aid will force issuers to come to market en masse to rebuild, he said.
In the primary market Wednesday, Loop Capital Markets priced for Temple University (Aa3/A+//) $240.485 million of revenue refunding bonds, First Series of 2025, with 5s of 4/2026 at 2.78%, 3.25s of 2040 at 2.96%, 5s of 2030 at 2.96%, 5s of 2035 at 3.23%, 5s of 2040 at 3.65% and 5s of 2045 at 4.06%, callable 4/1/2035.
In the competitive market, The Bristol-Plymouth Regional Vocational Technical School District, Massachusetts, sold $120 million of state-qualified GO school bonds, to Wells Fargo, with 5s of 4/2026 at 2.56%, 5s of 2030 at 2.68%, 5s of 2035 at 2.96%, 4s of 2040 at 3.54%, 4s of 2045 at 4.05%, 4s of 2050 at 4.18% and 4s of 2054 at 4.24%, callable 4/1/2033.
AAA scales
MMD's scale was little changed: The one-year was at 2.67% (unch) and 2.69% (unch) in two years. The five-year was at 2.79% (unch), the 10-year at 3.00% (unch) and the 30-year at 3.97% (+1) at 3 p.m.
The ICE AAA yield curve was cut up to three basis points: 2.70% (unch) in 2026 and 2.72% (+1) in 2027. The five-year was at 2.79% (unch), the 10-year was at 3.01% (unch) and the 30-year was at 3.90% (+3) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut up to a basis point in spots: The one-year was at 2.69% (+1) in 2025 and 2.72% (unch) in 2026. The five-year was at 2.79% (+1), the 10-year was at 3.01% (+1) and the 30-year yield was at 3.87% (+1) at 4 p.m.
Bloomberg BVAL was little changed: 2.65% (unch) in 2025 and 2.71% (unch) in 2026. The five-year at 2.82% (unch), the 10-year at 3.06% (unch) and the 30-year at 3.91% (+1) at 4 p.m.
Treasuries were slightly weaker on the short end.
The two-year UST was yielding 4.228% (+3), the three-year was at 4.271% (+3), the five-year at 4.354% (+2), the 10-year at 4.552% (+2), the 20-year at 4.852% (+1) and the 30-year at 4.790% (+1) near the close.
FOMC
The FOMC held rates in a range between 4.25% and 4.50%, by a unanimous vote, but removed wording about inflation progress.
The statement said, "Inflation remains somewhat elevated," and unemployment "stabilized at a low level." Risks, it said, "are roughly in balance," but the outlook is uncertain. Future moves will be data dependent.
Powell said the economy is strong and the Fed has made progress toward its goals and "policy is well positioned." But the rate remains above the Fed's estimate of neutral; in fact, Powell said, it is "meaningfully above it."
When asked about the possibility of a March cut, he said, data tells the committee "[w]e don't need to be in a hurry to adjust our policy stance." He also said the Fed won't change the 2% inflation target.
In responding to a question about President Donald Trump's demand for lower rates, Powell dismissed any pressure, saying, "We'll keep our heads down and do our work."
When asked about removing the line about progress toward its inflation goal, Powell said, "it was not meant to send a signal."
The Fed will watch political policy before reacting to it, he said. But it won't wait until inflation falls to 2% for further cuts.
"The market is already jumping on the omission of inflation progress from the FOMC statement as a hawkish signal," said Seema Shah, chief global strategist at Principal Asset Management. "Certainly, the plateauing in inflation improvement means that a rate cut is currently not a desperate requirement, so a pause makes sense."
With the Trump administration's policies still uncertain, she said, forecasts are difficult. "Keeping policy rates on hold until a clear direction starts to emerge is sensible."
However, Shah noted, with another "soft inflation print coupled with a slight weakening in jobs growth, we may start to hear a renewed dovish tone to Fedspeak."
"The lack of progress on inflation may be concerning the committee especially considering uncertain impact of executive and fiscal policies," said Wells Fargo Investment Institute head of Global Fixed Income Strategy
"While we continue to think the Fed's easing cycle has not yet run its course, the FOMC will want to see further progress in the inflation data to deliver the next rate cut highlighted by the fact they removed the reference on inflation making progress," said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management.
The statement was called "hawkish" by Daniela Sabin Hathorn, senior market analyst at Capital.com. "Whilst the central bank notes it is attentive to risks to both sides of its dual mandate, the vote to leave rates unchanged was unanimous, suggesting the current pause in rates will likely be extended further."
"Inflation no longer dropping and employment no longer weakening is less reason to cut rates on both fronts," said Chris Low, chief economist at FHN Financial. "Yields are a couple of basis points higher along the entire curve after the statement."
The hold "no doubt frustrate[d] President Trump … the Fed is clearly adopting a wait-and-see approach," said Richard Flax, chief investment officer at Moneyfarm. "Policymakers are likely assessing the impact of the president's policies on inflation and the broader economy, particularly as his stances on immigration and tariffs continue to unfold."
Markets hoped to learn what was needed for further cuts, "which was probably unreasonable given recent data on the labor market and inflation," said Sameer Samana, Wells Fargo Investment Institute senior global market strategist, which "led to disappointment."
A strong economy and labor market likely means "the Fed won't cut anytime soon."
"This hold is likely the easiest decision the Fed will make this year," said Olu Sonola, Fitch Ratings head of U.S. economic research. "From here on out, the pressure is on."
Particularly important to the Fed, he said, will be tariffs and labor supply.
