Munis improve, USTs mixed while inflation data muddies market outlook
7 min read
Municipal market outperformance continued Wednesday as triple-A yield curves saw an improved bias while U.S. Treasuries were mixed after inflation data threw more uncertainty over the Federal Reserve’s next moves.
The October consumer price index came in as projected, but stickiness in inflation — especially with expectations that President-elect Donald Trump’s policies will be inflationary — caused analysts to suggest the Federal Reserve may not cut rates as much as forecast next year.
The report “has reinforced expectations of a cautious approach by the Federal Reserve at its upcoming December meeting,” said Richard Flax, chief investment officer at Moneyfarm, although core on an annual basis “is still above the Fed’s comfort zone.”
Market reaction to the numbers was “tempered,” he said.
Triple-A yields were bumped up to two basis points 10 years and in while USTs made gains up front and saw losses out long.
The two-year municipal to UST ratio Wednesday was at 61%, the three-year at 60%, the five-year at 62%, the 10-year at 66% and the 30-year at 82%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 62%, the three-year at 61%, the five-year at 62%, the 10-year at 67% and the 30-year at 82% at 4 p.m.
“While the inflation rate remains moderate, the sustained pressure in core prices signals that the Fed may have to consider its rate policy carefully,” Flax said. “With the Fed’s December meeting on the horizon, the market currently prices in a roughly 60% chance of a third rate cut this year, reflecting ongoing concerns about inflation’s persistence even as growth has softened.”
But should inflationary pressures hold in 2025, “markets may anticipate that further rate cuts could be limited in scope, suggesting a more cautious investment outlook,” Flax said.
The municipal market has been “very strong” this year, with robust trading activity, positive mutual fund flows and better-than-anticipated issuance, said Craig Brandon, co-head of muni investments at Morgan Stanley Investment Management.
The past two trading sessions have seen muni yields little changed, making it feel “almost like we haven’t been impacted that much by the election,” Brandon said.
“Post-election volatility surged last week but the bias seems to be for more issuance, more demand in the coming weeks and months,” said Matt Fabian, a partner at Municipal Market Analytics.
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November’s total return prospects “are mixed,” Fabian said, “with recently strong seasonal advice clashing with the 2016 precedent of weaker municipals, challenged liquidity.”
Munis are outperforming USTs month- and year-to-date. Munis are seeing gains 0.57% in November and 1.38% in so far this year while USTs are negative 0.66% in this month and at positive 0.69% year-to-date.
High-yield munis are returning 0.58% in November and 6.45% year-to-date while taxables are at negative 0.52% so far this month and 1.90% in 2024.
This year, “going-away demand should emerge via [separately managed accounts] should yields get high enough on strong supply, which should now be expected following Republican victories and assumed higher risk to the tax-exemption going forward,” Fabian said.
“That dynamic — more issuing, more buying — may well dominate the coming months absent a clear reason for it not to occur,” he added.
Looking ahead to issuance expectations, Bond Buyer 30-day visible supply sits at $9.52 billion, while net supply will total negative $23 billion for November and December.
“That negative net supply, paired with strong demand, implies a strong technical environment as we close out 2024,” Daryl Clements, a municipal portfolio manager at AllianceBernstein, said. “With cash yields continuing to decline, investors should take advantage of the muni market opportunity.”
Fabian noted that valuation along the curve “is straightforward.”
“Maturities 10-years and in are currently reading as oversold, suggesting an incremental, near-term total return opportunity for buyers,” he said, while the second half of the curve is overbought, “meaning more potential for yields to rise, prices to fall in the coming days; buyers should be more careful with new purchases.”
Issuers, he said, “should disregard” those factors “and try to accelerate borrowing plans as possible,
The Investment Company Institute reported $165 million of
Exchange-traded funds saw $1.194 billion of inflows after $1.274 billion of inflows the previous week.
In the primary market Wednesday, J.P. Morgan priced for the Maryland Department of Transportation (A1//A+/) $223.94 million of Baltimore/Washington International Thurgood Marshall Airport AMT special transportation project revenue bonds, with 5s of 8/2027 at 3.38%, 5s of 2029 at 3.53%, 5s of 2034 at 3.83%, 5s of 2039 at 4.05%, 5.25s of 2044 at 4.21%, 5.25s of 2049 at 4.34% and 5.25s of 2054 at 4.41%, callable 8/1/2034.
In the competitive market, the Allen County Building Corp., Indiana, (Aa2///) sold $202.67 million of ad valorem property tax back-up lease rental revenue bonds to Jefferies, with 5s of 7/2028 at 2.80%, 5s of 1/2029 at 2.88%, 5s of 7/2029 at 2.89%, 5s of 1/2034 at 3.24%, 5s of 7/2034 at 3.26%, 5s of 7/2039 at 3.51%, and 4s of 7/2044 at 4.25%, callable 1/15/2035.
King County, Washington, (Aaa/AAA/AAA/) sold $102.405 million of unlimited tax general obligation bonds to J.P. Morgan, with 5s of 12/2025 at 2.84%, 5s of 2029 at 2.71%, 5s of 2034 at 3.04%, 5s of 2039 at 3.27% and 5s of 2044 at 3.63%, callable 12/1/2034.
AAA scales
Refinitiv MMD’s scale was bumped two basis points 10 years and in: The one-year was at 2.79% (-2) and 2.63% (-2) in two years. The five-year was at 2.64% (-2), the 10-year at 2.94% (-2) and the 30-year at 3.79% (unch) at 3 p.m.
The ICE AAA yield curve was little changed: 2.91% (unch) in 2025 and 2.69% (unch) in 2026. The five-year was at 2.67% (unch), the 10-year was at 2.95% (unch) and the 30-year was at 3.76% (-1) at 4 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.84% (-1) in 2025 and 2.65% (-2) in 2026. The five-year was at 2.62% (unch), the 10-year was at 2.92% (unch) and the 30-year yield was at 3.71% (unch) at 4 p.m.
Bloomberg BVAL was bumped one to two basis points: 2.82% (-1) in 2025 and 2.63% (-1) in 2026. The five-year at 2.67% (-1), the 10-year at 2.96% (-1) and the 30-year at 3.69% (-1) at 4 p.m.
Treasuries saw losses.
The two-year UST was yielding 4.279% (-6), the three-year was at 4.261% (-4), the five-year at 4.300% (-1), the 10-year at 4.450% (+2), the 20-year at 4.736% (+5) and the 30-year at 4.636% (+8) at the close.
CPI
Although the CPI numbers came in close to expectations, Scott Anderson, chief U.S. economist and managing director at BMO Economics, said, “stubborn inflationary pressures in the housing and service sectors continue to stymie the good news coming from goods and energy inflation.”
Markets may not believe inflation has been tamed, he said, and Fed officials “may need to pivot their rate-cutting expectations next year given possible inflationary changes in U.S. fiscal policy.”
Still, Anderson noted, “nothing in this report would keep the Fed from cutting in December, but the number of rate cuts in 2025 remains highly uncertain. The Fed will be taking its rate decisions one meeting at a time and will need to minimize its forward guidance.”
With progress on inflation having stalled in the past few months, said Wells Fargo Securities senior economists Sarah House and Michael Pugliese, the Fed will have to proceed “with monetary policy easing more slowly in the near term.”
They still expect a quarter-point cut in December “given the cumulative progress on inflation and the significant cooling in the labor market over the past year. That said, we believe the time is soon approaching when the FOMC will slow the pace of easing further, perhaps moving to an every-other-meeting pace of rate cuts.”
“Judging from recent remarks, including Jay Powell’s at last week’s press conference, the Fed is convinced inflation is still falling toward 2%,” noted Chris Low, chief economist at FHN Financial. “The FOMC will be less eager to ease if employment weakness is the only justification, especially if employment reinvigorates.”
While the Fed could cut in December, Jochen Stanzl, chief market analyst at CMC Markets, said it may take “a two or three month pause before the next cut.”
“With policymakers already so cautious about the risk of renewed price pressures, particularly amidst the continued strength of the U.S. economy and the potential Trump policy agenda, the Fed will need to tread a cautious path,” Seema Shah, chief global strategist at Principal Asset Management said. “The rising likelihood is that, come early 2025, rather than reducing policy rates at each meeting, the Fed is likely to slow its cutting pace to every other meeting.”
“While substantial progress has been made in the fight against elevated inflation, the ‘last mile’ is proving more challenging,” said Josh Jamner, investment strategy analyst at ClearBridge Investments. “This print should do little to shift futures markets that were pricing slightly better than a coin-flip chance of a 25 bps rate cut in December, although data releases before then (including next month’s CPI) should have a greater impact on the Fed’s decision.”
The data leaves “the Fed on track to cut rates in December,” said Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management. CPI “cools fears of an imminent slowdown in the pace of rate cuts. Still, with uncertainty over fiscal and trade policies high there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in.”
But Mercatus Center Macroeconomist Patrick Horan disagrees. “Unfortunately, the annualized 3-month average inflation rate rose to 3.6% from 3.1% from the previous month,” he said. “This indicates inflation is going in the wrong direction and weakens the case that the FOMC should go through with another rate cut next month.”
Primary to come
The California Public Finance Authority is set to price this week $455.105 million of The James senior living revenue bonds, consisting of $441.405 million of Series 2024A and $13.7 million of Series 2024B. HJ Sims.
The Los Angeles Department of Water and Power (Aa2/AA-//AA) is set to price Thursday $448.71 million of power system revenue refunding bonds, serials 2028-2036, 2039, 2048, 2054. Wells Fargo.
The Los Angeles Community College District (Aaa/AA+//) is set to price Thursday $300 million of general obligation bonds. Goldman Sachs.
The Massachusetts Housing Finance Agency (Aa2/AA+//) is set to price Thursday $160.26 million of non-AMT sustainability housing bonds, consisting of $42.285 million of Series B-1, serials 2028-2037, terms 2039, 2044, 2049 2054, 2059, 2064, 2067, and $116.975 million of Series B-3, serials 2027-2029. RBC Capital Markets.
Gary Siegel contributed to this article.
