Munis slightly weaker with small cuts

Bond markets were relatively quiet with munis and U.S. Treasuries cheapening slightly, while equities ended up.

Munis saw cuts, albeit small ones, for the first time in nearly two weeks as yields rose up to four basis points, depending on the scale.

The extended rally took a bit of a pause over the past week, when yields were only slightly firmer each trading session on Monday through Wednesday and then slightly weaker on Thursday.

Sometimes, the market has a tendency to get “overdone,” so there will probably be a pullback in prices for a while and digest a little bit more supply, said Tim McGregor, managing partner at Riverbend Capital Advisors.

“The momentum probably carried things a little too far,” he said.

The two-year muni-UST ratio Thursday was at 57%, the five-year at 59%, the 10-year at 70% and the 30-year at 89%, according to Municipal Market Data’s 3 p.m. ET read. ICE Data Services had the two-year at 57%, the five-year at 58%, the 10-year at 70% and the 30-year at 90% at a 4 p.m. read.

Supply has been manageable for a bit, but there will be a good pickup in the fall, McGregor said.

Munis returns are good, which is a big move, most likely carried by the market’s positive tone, he said.

Investment-grade munis are seeing gains of 2.72% month-to-date and 3.05% year-to-date. High-yield munis are seeing positive returns of 3.02% MTD and 1.68% YTD. Taxable munis are up 1.64% MTD and 6.80% YTD.

Retail tends to chase returns, as money has come into mutual funds and exchange-traded funds, McGregor said.

“The NAV is moving and then they start piling on,” he noted.

With September half over, “allocations by tenor have followed an upward linear path as supply pushed the year-to-date total above $400 billion,” said Kim Olsan, senior fixed income portfolio manager at New Square Capital.

“Another easing cycle — if perhaps likely to be staggered — gave sellers of long bonds better looks from potential buyers with the extreme steepness of the muni curve,” she said.

Generic AAA muni 30-year/10-year slopes are more than double the same UST curve at 130 basis points, Olsan said.

Extension has been “rewarded” in a big way, as the one- to two-year index is seeing gains of 0.32% month-to-date, while a 22-year and longer index gain is 4.50% so far in September, she said.

“The outperformance in just a couple of weeks of long-term bonds has helped 2025 results, but the category is still lagging the broad market by about 230 basis points,” Olsan said.

“Results at the quality level have held neutral among Aaa, AA and single-A bonds (up 2.6% to 2.8% this month), but some risk taking is being encouraged in the Baa-rated range where in two weeks’ time gains stand at 3.2%,” she said.

There might be “caution to build is inside five years, as curves are inverted from 2026 to 2030, but more importantly, AAA-rated bonds carry yields at or through 2.00%,” Olsan said.

A sale of Georgia GO 5s due 2028 at 2.01% “begs the question of balancing buyers’ needs with fair value — with a mere 57% ratio to the three-year UST,” she said.

Secondary trades (fixed coupons) with up to three-year maturities account for 10% of all volume month-to-date, ticking down 2% from the prior 90 days, Olsan said.

“Given rich valuations in this range, short call structures can be expected to offer some concession in the meantime,” she said.

Fund flows
Investors added $1.045 billion to municipal bond mutual funds in the week ended Wednesday, following $2.182 billion of inflows the prior week, according to LSEG Lipper data. This is some “moderation” after last week’s massive inflow, according to J.P. Morgan strategists, led by Peter DeGroot.

High-yield funds saw inflows of $424.8 million compared to inflows of $1.064 billion the previous week.

Tax-exempt municipal money market funds saw outflows of $1.315 billion for the week ending Sept. 16, bringing total assets to $136.951 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 2.35%.

Taxable money-fund assets saw $8.352 billion pulled, bringing the total to $7.112 trillion.

The average seven-day simple yield was at 3.95%.

The SIFMA Swap Index was at 2.70% on Wednesday compared to the previous week’s 2.60%, the sixth straight week that the Index has remained in a very tight 20 basis point range of 2.60%-2.80%, said Rick White, an independent consultant.

“We are taking a nice break from the extreme volatility that we had gotten accustomed to,” he said.

These smaller weekly changes in SIFMA “have been driven by relatively stable unsold dealer inventories, which have been averaging between $2.5 billion to $3.5 billion for the past month and a half,” White said.

CUSIP requests rise
In August, the aggregate total of identifier requests for new municipal securities — including municipal bonds, long-term and short-term notes, and commercial paper — rose 5.5% versus July totals.

On a year-over-year basis, overall municipal volumes were up 20.4% through the end of August.

Texas led state-level municipal request volume with a total of 310 new CUSIP requests in August, followed by New York (181) and California (85).

For the specific category of municipal bonds, there was an increase of 4.2% month-over-month, but these requests are still up 20.7% on a year-over-year basis.

AAA scales
MMD’s scale was cut two basis points outside of one year: The one-year was at 2.12% (unch) and 2.02% (+2) in two years. The five-year was at 2.15% (+2), the 10-year at 2.88% (+2) and the 30-year at 4.21% (+2) at 3 p.m.

The ICE AAA yield curve was cut two to four basis points: 2.10% (+4) in 2026 and 2.04% (+4) in 2027. The five-year was at 2.13% (+3), the 10-year was at 2.84% (+3) and the 30-year was at 4.21% (+2) at 4 p.m.

The S&P Global Market Intelligence municipal curve saw small cuts two years and out: The one-year was at 2.11% (unch) in 2025 and 2.01% (+2) in 2026. The five-year was at 2.16% (+2), the 10-year was at 2.88% (+2) and the 30-year yield was at 4.21% (+2) at 3 p.m.

Bloomberg BVAL was cut up to two basis points: 2.03% (unch) in 2025 and 2.00% (unch) in 2026. The five-year at 2.10% (+1), the 10-year at 2.83% (+1) and the 30-year at 4.18% (+2) at 4 p.m.

Treasuries saw small losses.

The two-year UST was yielding 3.569% (+2), the three-year was at 3.551% (+1), the five-year at 3.669% (+1), the 10-year at 4.113% (+2), the 20-year at 4.696% (+4) and the 30-year at 4.731% (+4) at the close.