Bond markets firm, inflows into muni mutual funds continue

The bond market firmed Thursday as both muni and U.S. Treasury yields fell, and equities ended up.

Muni yields were bumped up to five basis points, depending on the scale, while UST yields fell three to five basis points.

The two-year muni-UST ratio Thursday was at 61%, the five-year at 64%, the 10-year at 76% and the 30-year at 93%, 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 93% at a 4 p.m. read.

Issuance through the end of August is at $386.689 billion, up 14.9% from $336.478 billion over the same period in 2024, according to LSEG.

While supply is set to break records again this year, the question is whether this rapid pace of issuance can continue.

“To some degree, inflation and the cost of construction have added to the higher new issue cycle; also spending down the COVID relief funds, may have escalated the new issue [market] over the last 18 months or so, and perhaps that starts to ebb over time,” said Doug Vissicchio, head of municipal sales, underwriting and trading at UBS.

And as issuance “moderates” for the rest of the year now that the tax exemption was not eliminated and the tax bill is law, total returns should recover, said Cooper Howard, a fixed income strategist at Charles Schwab.

Munis are seeing gains of 0.39% year-to-date, largely due to elevated issuance, he said.

Higher issuance pulled prices lower because of a supply/demand imbalance, Howard said.

Issuance tends to be longer out the curve, and demand, “where people feel a bit safer at times,” is on the short end of the curve, Vissicchio said, leading to the muni curve being twice as steep as the UST curve.

“That speaks to the retail demand component coming in so aggressively in the short end,” he said.

Furthermore, throughout the year, retail has stayed resilient, Vissicchio said.

Banks, though, have been net sellers, with some high-profile portfolio sales this summer, and there is not enough money coming in from insurance companies and crossover buyers to move the needle on the long end, according to Vissicchio.

The secondary market is driven by the selling of older structured bonds to buy the newer, better call structures, he said.

“There’s more leverage this year coming in through the use of tender option bond programs. There’s more usage as the curve is steep, and that becomes a beneficial trade for those funds that are using TOB structures,” Vissicchio said.

Elsewhere, Howard expects default rates to remain low for the rest of the year, noting munis default much less often than corporate bonds with similar credit ratings.

“Although some issuers face risks, such as reduced federal funding, a slowdown in tax revenues and higher expenses, we expect most issuers will be able to adequately manage through the headwinds,” he said.

In the primary market Thursday, BofA Securities priced for the Dormitory Authority of the State of New York (Aa1//AA+/) $2.059 billion of tax-exempt general purpose state personal income tax revenue bonds, Series 2025C, with 5s of 3/2027 at 2.25%, 5s of 2030 at 2.65%, 5s of 2035 at 3.43%, 5s of 2040 at 4.18%, 5s of 2045 at 4.70%, 5.25s of 2050 at 4.83% and 5s of 2055 at 4.93%, callable 9/2035.

BofA Securities priced for the Michigan State Housing Development Authority (/AA+//) $360.17 million of non-AMT rental housing revenue bonds, Series 2025A-1, at par, with 2.875s of 4/2028, 2.95s of 10/2028, 3.15s of 4/2030, 3.3s of 10/2030, 4s of 4/2035, 4.125s of 10/2035, 4.875s of 10/2040, 5.15s of 10/2045, 5.25s of 10/2050, 5.3s of 10/2055, 5.4s of 10/2060 and 5.50s of 10/2068, callable 10/2033.

BofA Securities priced for the Los Angeles Department of Water and Power (Aa2//AA-/AA/) $166.045 million of water system revenue bonds, Series 2025B, with 5s of 7/2031 at 2.95% and 5s of 2035 at 3.53%, noncall.

Barclays priced for the Connecticut Health and Educational Facilities Authority (A3/A-//) $129.42 million of Quinnipiac University issue revenue refunding bonds, Series O, with 5s of 7/2026 at 2.44%, 5s of 2030 at 2.69%, 5s of 2035 at 3.53% and 5s of 2036 at 3.70%, callable 7/2035.

In the competitive market, Brownsville, Texas, (Aa3/AA+//) sold $143.86 million of combination tax and revenue certificates of obligation, Series 2025A, to BofA Securities, with 5s of 2/2027 at 2.37%, 5s of 2030 at 2.60%, 5s of 2035 at 3.44%, 5s of 2040 at 4.23%, 5s of 2045 at 4.78% and 5s of 2046 at 4.83%, callable 2/2035.

Fund flows
Investors added $672.3 million to municipal bond mutual funds in the week ended Wednesday, following $590.4 million of inflows the prior week, according to LSEG Lipper data.

High-yield funds saw inflows of $238.1 million compared to inflows of $126.3 million the previous week.

Tax-exempt municipal money market funds saw outflows of $850.7 million for the week ending Sept. 2, bringing total assets to $136.161 billion, according to the Money Fund Report, a weekly publication of EPFR.

The average seven-day simple yield for all tax-free and municipal money-market funds rose to 2.52%.

Taxable money-fund assets saw $39.469 billion added, bringing the total to $7.077 trillion.

The average seven-day simple yield was at 3.97%.

The SIFMA Swap Index was at 2.63% on Wednesday compared to the previous week’s 2.73%.

AAA scales
MMD’s scale saw bumps outside one year: The one-year was at 2.21% (+2) and 2.18% (-3) in two years. The five-year was at 2.35% (-3), the 10-year at 3.16% (-5) and the 30-year at 4.55% (-5) at 3 p.m.

The ICE AAA yield curve was bumped up to four basis points: 2.24% (unch) in 2026 and 2.18% (-1) in 2027. The five-year was at 2.37% (-3), the 10-year was at 3.13% (-3) and the 30-year was at 4.55% (-3) at 4 p.m.

The S&P Global Market Intelligence municipal curve was bumped up to five basis points: The one-year was at 2.19% (unch) in 2025 and 2.17% (-4) in 2026. The five-year was at 2.34% (-4), the 10-year was at 3.17% (-5) and the 30-year yield was at 4.55% (-5) at 4 p.m.

Bloomberg BVAL was bumped one to four basis points: 2.15% (-1) in 2025 and 2.16% (-2) in 2026. The five-year at 2.31% (-3), the 10-year at 3.13% (-4) and the 30-year at 4.54% (-4) at 4 p.m.

Treasuries saw gains.

The two-year UST was yielding 3.587% (-3), the three-year was at 3.547% (-4), the five-year at 3.646% (-5), the 10-year at 4.166% (-5), the 20-year at 4.849% (-4) and the 30-year at 4.862% (-4) near the close.

Frank Gargano contributed to this story.