Municipals rallied Thursday with AAA yields falling dramatically, erasing all of Wednesday's losses and then some around noon, as the market reacted positively to a 90-day pause on most of President Donald Trump's retaliatory tariff plan.
Triple-A yield curves saw yields fall anywhere from 30 to 50 basis points, depending on the scale.
The past few sessions have been some of the most volatile in history.
Of the largest single-session muni yield adjustments that have occurred in the past 45 years, the three largest were in March 2020 during the onslaught of COVID. The fourth was in 1981, the fifth was during COVID, and then the sixth and the seventh were Monday and Wednesday, said Alex Chilton, Head of Municipal Securities at Morgan Stanley,
"And if you look at the data a little bit differently … if you add up the first three days – Monday, Tuesday and Wednesday – 90 basis points, that is the second largest move since we have data here in the muni market, and that includes the 1980s," Chilton said.
As munis started to sell off, the asset class saw on Monday its worst one-day returns of negative 2.85% in over 30 years, pushing month-to-date and year-to-date returns negative. Munis saw losses of 0.40% on Tuesday and negative 2% on Wednesday, pushing month-to-date and year-to-date returns even lower.
"Monday, you couldn't sell a bond if you wanted to," Sean Carney, chief investment officer at BlackRock, said at the conference. "Tuesday, you couldn't sell a bond if you wanted to. Wednesday, you couldn't sell a bond until 1:30 and then you couldn't buy one," he said. "So, I think there's a lot of questions here about muni market liquidity."
Wednesday hit a record for the number of trades at 112,600 in the muni market, the highest figure since 1995, as $32.5 billion changed hands, the highest figure since March 2020, according to MSRB data. The 10-year average is 11,964 trades and $11.9 billion, the data shows.
And even with the 90-day tariff extension, which had led bid wanted activity to slow slightly, bid wanteds remained elevated Wednesday with $2.9 billion in par. This follows the high of $3.1 billion on Tuesday.
Midmorning Thursday spreads have been "well contained" and no one's panic and selling risk, said Jeff Timlin, a managing partner at Sage Advisory.
While there has been broad-based selling, sellers have been utilizing more AAA and AAA names; however, there is a good spattering of AA and BBBs, he said.
"It hasn't lent itself to broad-based spread widening," Timlin said.
Trump announced midday Wednesday that he was granting a 90-day extension to all countries, except for China, which sent stocks soaring. U.S. Treasuries whipsawed and were mixed at the close, while munis kept their midday losses to end the day — with only one AAA scale paring back cuts — as the
With the movements in yields today, "I would assume we could have one of the most up days that has ever printed today. And it doesn't help. It just adds to the volatility of the market," Carney said.
"This is why I think Monday is so important – getting back and resetting on Monday and figuring out what issues are going to come back to the market, off the day-to-day calendar, and what it's going to look like for the next two, three weeks.
"That's what's going to put investors back in their seat and want to buy bonds," he said.
"With most new issues on hold and a negative tone pre-tariff pivot, the HG municipal scale closed with cuts of 42-42-35-30bps in 2-5-10-30yrs, respectively," said J.P. Morgan strategists led by Peter DeGroot.
However, they noted "it is apparent that the scale did not reflect trades and offering levels subsequent to the tariff announcement."
Trade data, J.P. Morgan strategists said, signals that the long-end recovered around 20 basis points following Trump's announcement.
This is already being seen in several AAA scales.
MMD's AAA scale was cuts of 30 to 42 basis points, with the greatest longs on the front end of the curve. The scale is seeing, as of a 10:15 a.m. reading, 43 to 50 basis point bumps, this time with the front seeing the greatest gains. The last time yields were bumped this much in a single trading session was in March 2022.
The ICE AAA yield curve was cut 20 to 21 basis points by the close on Wednesday, but is seeing yields bumped 30 to 40 basis points right before noon.
Bloomberg BVAL was cut 29 to 32 basis points Wednesday, but yields have retracted and are seeing bumps of 45 to 50 basis points this morning.
Even without the tariff-induced market volatility, there is still a fairly weak technical environment muni, as supply continues to remain robust, even with the deals postponed or moved to the day-to-day calendar, Timlin noted.
Therefore, munis may experience poor performance until June, where there is some potential strength due to the increase in redemptions, maturity and coupon payments.
