Munis strengthen as market is ‘doing well’

Municipals were slightly firmer Wednesday as U.S. Treasuries richened and equities ended mixed.

The two-year muni-UST ratio Wednesday was at 61%, the five-year at 65%, the 10-year at 76% and the 30-year at 94%, according to Municipal Market Data’s 3 p.m. ET read. ICE Data Services had the two-year at 60%, the five-year at 64%, the 10-year at 74% and the 30-year at 92% at a 4 p.m. read.

The Investment Company Institute Wednesday reported inflows of $356 million for the week ending Aug. 27, following $732 million of outflows the previous week.

Exchange-traded funds saw inflows of $1.219 billion after $2.555 billion of inflows the week prior, per ICI data.

Muni bond trading activity leading up to Labor Day was limited and resulted in “AAA tax-exempt yields a [basis point] or two richer along a slightly steeper yield curve,” said Matt Fabian, a partner at Municipal Market Analytics.

Curve steepening, “driven again last week by U.S. Treasury movements incorporating more investor confidence that a Fed[eral Reserve] rate cut is imminent” persists, meaning “there is simply too much uncertainty at present for long bonds to rally by much,” he added.

That uncertainty includes last week’s court decision on President Donald Trump’s tariffs being declared illegal, pending review by the Supreme Court, which Fabian notes is “potentially, a highly disruptive development helping bonds and stocks sell off today.”

In August, investor reaction to the Fed’s policy moves, combined with “outsized positive net supply [and] mixed economic data,” saw tax-exempts outperform across the curve as 2s30s continued to bear steepen,” said Peter Block, managing director and municipal strategist at Ramirez.

The AAA 2s/30s spread has widened by 11 basis points since the start of last month and 128 basis points since the beginning of the year, according to Refinitiv MMD.

“Once again, new issue investors were selective on structure, sector, state and quality, reinforcing a bifurcated market bereft of breadth and liquidity for duration and credit,” Block said.

Secondary market activity for the month “remained below average as new issue throughput dominated flows,” while dealer balance sheets are near capacity, he added.

Primary muni catalysts include the possibility of two 25-basis-point rate cuts from the Federal Open Market Committee through year-end, an uncertain trade and geopolitical landscape and positive net supply, according to Block.

Looking solely at internal factors, “the municipal market itself is still doing well, reasonably via the temporary drop in new issue supply amid a more lasting reduction in reinvestment flows,” Fabian said.

“The secret remains a nominal AAA yield curve cheap and steep enough to attract [separately managed account]/income buyers,” as August ended with more than 1.5 million trades, he said, adding the wavering price trend may be undercutting managed mutual fund flows.

Year-to-date, exchange-traded funds have received 2.3 times more flows compared to their traditional mutual fund peers, whose NAVs are flat or negative across the same period of time, Fabian said.

Current MMA predictions say “the new issue calendar will begin to pick up shortly, continuing into year-end,” provided there is no major correction or selloff, he said, adding full-year supply figures are expected to reach $576 billion.

In the primary market Wednesday, BofA Securities priced for Delray Beach, Florida, (Aa3/AA-//) $148.675 million of water and sewer revenue improvement bonds, 2025, with 5s of 10/2029 at 2.40%, 5s of 2030 at 2.52%, 5s of 2035 at 3.43%, 5s of 2040 at 4.20%, 5s of 2045 at 4.70%, 5.25s of 2050 at 4.86% and 5.25s of 2055 at 4.89%, callable 10/1/2035.

In the competitive market, the Santa Clara Unified School District, California, (Aaa/AAA/) is set to sell $190 million of Election of 2018 GOs, to Morgan Stanley, with 4s of 7/2026 at 1.89%, 4s of 2030 at 2.02% and 4s of 2033 at 2.49%, noncall.

AAA scales
MMD’s scale bumped two basis points eight years and out: The one-year was at 2.19% (unch) and 2.21% (unch) in two years. The five-year was at 2.38% (unch), the 10-year at 3.21% (-2) and the 30-year at 4.60% (-2) at 3 p.m.

The ICE AAA yield curve was bumped one to three basis points: 2.24% (-1) in 2026 and 2.19% (-2) in 2027. The five-year was at 2.40% (-2), the 10-year was at 3.16% (-2) and the 30-year was at 4.58% (-3) at 4 p.m.

The S&P Global Market Intelligence municipal curve was bumped up to two basis points: The one-year was at 2.19% (unch) in 2025 and 2.21% (unch) in 2026. The five-year was at 2.38% (unch), the 10-year was at 3.22% (-2) and the 30-year yield was at 4.60% (-2) at 4 p.m.

Bloomberg BVAL was bumped one to two basis points: 2.16% (-1) in 2025 and 2.18% (-1) in 2026. The five-year at 2.34% (-1), the 10-year at 3.17% (-2) and the 30-year at 4.58% (-1) at 4 p.m.

Treasuries saw gains.

The two-year UST was yielding 3.614% (-3), the three-year was at 3.581% (-3), the five-year at 3.691% (-3), the 10-year at 4.218% (-4), the 20-year at 4.85% (-6) and the 30-year at 4.899% (-6) near the close.

Primary to come
The Dormitory Authority of the State of New York (Aa1//AA+/) is set to price Thursday $2.337 billion of general purpose state personal income tax revenue bonds, Series 2025C. BofA Securities.

The Massachusetts School Building Authority (/AA/AA+/) is set to price Thursday $1.892 billion of social bonds, consisting of $488.845 million of subordinated dedicated sales tax bonds, Series 2025A, and $1.404 billion of refunding bonds, Series 2025B, BofA Securities.

The Michigan State Housing Development Authority (/AA+//) is set to price Thursday $360.06 million of rental housing revenue bonds, Series 2025A-1. BofA Securities.

The Los Angeles Department of Water and Power (Aa2//AA-/AA) is set to price Thursday $166.045 million of water system revenue bonds, Series 2025B. BofA Securities.

The Regents of the University of Colorado (Aa1//AA+/) is set to price Thursday $140.535 million of university enterprise revenue bonds, consisting of $76.555 million of Series C-1 and $63.98 million of Series C-2 refunding bonds. Stifel.

The Connecticut Health and Educational Facilities Authority (A3/A-//) is set to price Thursday $129.66 million of Quinnipiac University issue revenue refunding bonds, Series O. Barclays.

The Riverside Unified School District (Aa2///) is set to price Thursday $106.33 million of GOs, consisting of $40 million of Election of 2016 GOs, Series D, and $66.33 million of 2025 GO refunding bonds. Piper Sandler.

Competitive
Brownsville, Texas, (Aa3/AA+/) is set to sell $143.86 million of combination tax and revenue certificates of obligation, Series 2025A, at 11 a.m. on Thursday.

The Hartford County Metropolitan District, Connecticut, (Aa2/AA//) is set to sell $100 million of GOs at noon on Thursday.

Jessica Lerner contributed to this report.