Munis steady on rising inflation concerns

Municipals were steady once more, as surging producer prices sent U.S. Treasury yields higher, equities ended narrowly mixed. The specter of higher inflation lowered the chances of a Federal Reserve rate cut in September and, for now, eliminated talk of a half-point easing.

The two-year muni-UST ratio Wednesday was at 60%, the five-year at 63%, the 10-year at 75% 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 75% and the 30-year at 95% at a 4 p.m. read.

Two themes for munis emerged this year: underperformance versus the Treasury market and the steepening of the yield curve, said Ben Barber, director of municipal bonds at Franklin Templeton.

“Both of those things lead us to a situation [where] the municipal market is attractive from a valuation perspective right now,” he said.

Credit spreads haven’t done much year-to-date, which “feels pretty attractive as well,” given that many of the overall credit fundamentals across traditional muni sectors continue to be at least neutral, if not slightly positive, Barber said.

“We like the muni market here largely because of where valuations are,” he said.

The driver of valuations getting to this attractive level has been the technical balance in our market, according to Barber.

Last year saw record issuance at just over $500 billion, and this year is on track to exceed that amount, while the demand side of the equation has been reasonably positive.

Demand shifted from open-end mutual funds into separately managed accounts over the last couple of years, Barber noted.

This shift, which accelerated in 2022, “has meant that you’ve got implications on the yield curve [and] implications on the credit spreads. And it makes the market quite attractive,” he said.

Meanwhile, given two years of record supply, the underwriting community has been erring on the side of pricing deals a little cheaper so they can be sold, Barber said.

This theme can be seen across the entire credit spectrum and term structure, he said.

Additionally, the underwriting community is “not terribly happy” to be long bonds after a primary market deal, resulting in massive oversubscriptions, Barber said.

“They want to have these things priced to sell and to sell very quickly and easily,” he said.

Elsewhere, long-end muni-UST ratios are cheaper year-to-date.

At the start of the year, 30-year ratios were around 80%, but now they are higher at 95%, which Barber describes as a big move.

Before 2008, when the market was 60% to 65% AAA-rated by virtue of the insurance wraps, a three to five percentage point move over the course of the year was considered big, according to Barber.

During that time, munis and Treasuries were quite correlated with one another, but in a “post-2008 world, with the inability to hedge muni duration effectively the way you could pre-2008,” munis and USTs are less correlated.

Furthermore, this inability to efficiently hedge muni duration has made the muni market less efficient, Barber said.

In the primary market Thursday, Wells Fargo priced for Philadelphia (A1//A+/) a $366.03 million deal. The first tranche, $107.39 million of non-AMT/governmental airport revenue bonds, Series 2025A, saw 5s of 7/2029 at 2.42%, 5s of 2030 at 2.52%, 5s of 2035 at 3.45%, 5s of 2040 at 4.24%, 5.25s of 2045 at 4.72%, 5.5s of 2051 at 4.86% and 5.5s of 2055 at 4.90%, callable 7/2035.

The second tranche, $258.64 million of AMT/private activity airport revenue and refunding bonds, Series 2025B, saw 5s of 7/2026 at 2.83%, 5s of 2030 at 3.12%, 5s of 2035 at 4.04%, 5s of 2040 at 4.69%, 5.25s of 2045 at 5.00%, 5.5s of 2051 at 5.06% and 5s of 2055 at 5.18%, callable 7/2035.

BofA Securities priced for the Los Angeles Department of Water and Power (Aa2//AA-/AA/) $374.47 million of water system revenue bonds, Series 2025A, with 5s of 1/2030 at 2.90%, callable 7/2029.

Jefferies priced for the Alamo Community College District (Aaa/AAA//) $294.355 million of limited tax and refunding bonds, with 5s of 8/2026 at 2.35%, 5s of 2029 at 2.46%, 5s of 2035 at 3.51%, 5s of 2040 at 4.18%, 5s of 2045 at 4.69%, 5.25s of 2050 at 4.81% and 4.75s of 2050 at 5.00%, callable 8/2034.

BofA Securities priced for the Washington Health Care Facilities Authority (/A/A+/) $177.64 million of tax-exempt fixed-rate revenue bonds (Multicare Health System), Series 2025A, with 5s of 8/2026 at 2.76%, 5s of 2030 at 3.07% and 5s of 2035 at 3.99%, noncall.

Wells Fargo priced for the Regents of the University of Idaho (/AA//) $138.405 million of Assured Guaranty Inc.-insured GOs, Series 2025A, with 5s of 4/2028 at 2.55%, 5s of 2030 at 2.73%, 5s of 2035 at 3.54%, 5s of 2040 at 4.32%, 5.5s of 2045 at 4.77%, 5.5s of 2051 at 4.94%, 5.5s of 2055 at 4.96% and 5.5s of 2057 at 5.03%, callable 4/2035.

Fund flows
Investors pulled $107.9 million from municipal bond mutual funds in the week ended Wednesday, following $1.656 billion of inflows the prior week, according to LSEG Lipper data.

High-yield funds saw small outflows of $17.8 million compared to inflows of $224.2 million the previous week.

Tax-exempt municipal money market funds saw outflows of $2.432 billion for the week ending Aug. 12, bringing total assets to $136.798 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 fell to 1.77%.

Taxable money-fund assets saw $34.613 billion added, bringing the total to $7.013 trillion.

The average seven-day simple yield was at 3.98%.

The SIFMA Swap Index was at 2.80% on Wednesday compared to the previous week’s 1.69%.

AAA scales
MMD’s scale was unchanged: The one-year was at 2.23% and 2.25% in two years. The five-year was at 2.41%, the 10-year at 3.22% and the 30-year at 4.58% at 3 p.m.

The ICE AAA yield curve was cut one to two basis points: 2.22% (+1) in 2026 and 2.20% (+1) in 2027. The five-year was at 2.41% (+1), the 10-year was at 3.16% (+1) and the 30-year was at 4.58% (+2) at 4 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.22% in 2025 and 2.24% in 2026. The five-year was at 2.40%, the 10-year was at 3.21% and the 30-year yield was at 4.57% at 4 p.m.

Bloomberg BVAL was unchanged: 2.22% in 2025 and 2.24% in 2026. The five-year at 2.38%, the 10-year at 3.15% and the 30-year at 4.57% at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 3.733% (+6), the three-year was at 3.699% (+6), the five-year at 3.816% (+5), the 10-year at 4.288% (+5), the 20-year at 4.853% (+6) and the 30-year at 4.878% (+5) near the close.

PPI
The latest inflation report — the producer price index — threw a monkey wrench into expectations for a big rate cut in September, and according to some economists, may put into question any easing next month.

“The large spike in the producer price index this morning shows inflation is coursing through the economy, even if it hasn’t been felt by consumers yet,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management. “Given how benign the [consumer price index] numbers were on Tuesday, this is a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a ‘guaranteed’ rate cut next month.”

Still, he noted, more data will be released before the Federal Open Market Committee meets on Sept. 16 and 17, including another CPI and PPI and an employment report.

Equities ending narrowly mixed after reacting negatively at first to the PPI report, is a “strong indication that the market doesn’t need rate cuts to keep moving higher,” Zaccarelli said.

The report “casts serious doubt on Treasury Secretary Scott Bessent’s claims that the Fed should be cutting rates 50bp in September,” said James Knightley, chief international economist at ING.

“In terms of the implications for the Fed’s favored inflation measure, the core PCE deflator, the PPI components that feed through are mixed,” he said, suggesting the market will expect a 0.2% to 0.3% gain in the number, which will be released at the end of the month.

While that figure would allow a September easing, ” the bulk of the Fed won’t be backing a 50bp cut after this,” Knightley said.

And while PPI “is volatile during the best of times,” said BMO Senior Economist Jennifer Lee, “this is a little difficult to ignore.”

Even though the validity of the data will be questioned, she said, “this emboldens those who are less dovish on the Fed that a September cut is not a done deal.”

Gina Bolvin, president of Bolvin Wealth Management Group, said, “The 0.9% jump in PPI reflects lingering cost pressures — some driven by tariffs — but core inflation trends remain contained. It’s a reminder that the path to lower rates may not be linear, but the broader disinflationary trend is still intact.”

Investors should not panic, she said, but rather “focus on fundamentals, maintain diversification, and look for companies with strong pricing power and healthy margins.”

The Fed will focus more on the upcoming employment report than these hot PPI numbers, said Bill Adams, chief economist for Comerica Bank. Still, he said, “The report is another pebble on the scale against a rate cut at the Fed’s September meeting.”

Still, the chances of the Fed “holding rates steady will be higher if the unemployment rate is stable or lower at the next release on September 5,” Adams said.

Gary Siegel and Frank Gargano contributed to this story.