Short-end correction continues

Municipals continued to face pressure Thursday as the front-end correction continued. U.S. Treasuries saw yields rise and equities ended down.

The two-year muni-UST ratio Thursday was at 60%, the five-year at 60%, the 10-year at 70% and the 30-year at 90%, according to Municipal Market Data’s 3 p.m. ET read. ICE Data Services had the two-year at 60%, the five-year at 60%, the 10-year at 70% and the 30-year at 90% at a 4 p.m. read.

Muni yields rose up to 10 basis points, with the largest losses on the front end.

The short-end correction has been “driven by a solid labor market report, which pushed Treasury yields higher as expectations for additional Fed[eral Reserve] rate cuts tempered,” said Alice Cheng, director of municipal credit and investor strategy at Janney.

Elevated new-issue supply this week may also have led to some pressure on the short end, but the key driver is the macroeconomic backdrop, she said.

The correction has been “overdue” as ratios have been attractive, offering investors the opportunity to park themselves on the front-end for a period, said Chris Brigati, managing director and CIO at SWBC.

“We’re finally seeing a little bit of that backing off because people are starting to see the value a little bit at the curve too,” he said.

As rates were “pushed down” quite a bit, where the 10-year UST was at 4%, and ratios were overdone, “people are getting out of the front end, because they’re seeing this front end is probably going to go down, so they want to lock in some higher, longer-term rates while they’re here,” Brigati said.

Additionally, as valuations were “extreme” and the maturity money from September was pouring into the market indiscriminately, market participants wanted to stay away from the front end of the curve, said Tim McGregor, managing partner at Riverbend Capital Markets.

Due to this, there was some writing on the wall for a “pretty big adjustment,” as the massive front-end correction was overdue, he said, noting it may even have a little bit more to go.

The muni market is in a cyclical period this time of year where there is some cheapness and a bit of a “performance adjustment” heading into October, he noted.

There is $14.8 billion of issuance this week in a period where rates have come down, “where we’re at the low end, where we have been over the better part of the past six months,” Brigati said.

“There’s a reason for people to hit the pause button a little bit. In doing so, coupled with the demand side being a little bit lighter with very big supply … — one of the biggest of this year — that’s causing a little bit of cheapness in the market and it’s a little bit of a correction that’s almost normal,” he said.

Investors pulled $17.9 million from municipal bond mutual funds in the week ended Wednesday, following $1.049 billion of inflows the prior week, according to LSEG Lipper data.

High-yield funds saw inflows of $136.5 million compared to inflows of $424.8 million the previous week.

The outflows from muni mutual funds — driven by outflows from exchange-traded funds — come after five weeks of straight inflows.

This is the second week of outflows over the past 10 weeks and the third week over the last 22 weeks, according to J.P. Morgan strategists.

“Much of the recent flows into muni mutual funds have been fueled by asset re-allocations. I wouldn’t be surprised if some of the extreme volatility in the equity market has led some investors to pause those moves between asset classes,” said Pat Luby, head of municipal strategy at CreditSights.

In the primary market Wednesday, Wells Fargo preliminarily priced for California (Aa2/AA-/AA//) $2.15 billion of GOs. The first tranche, $689.545 million of various purpose GOs, saw 5s of 8/2026 at 2.21%, 5s of 2031 at 2.49%, 5s of 2035 at 3.04%, 5s of 2041 at 3.78%, 5s of 2044 at 4.06%, 5s of 2050 at 4.31% and 5.25s of 2055 at 4.31%, callable 8/2035.

The second tranche, $1.46 billion of various purpose refunding GOs, saw 5s of 2/2026 at 2.21%, 5s of 8/2026 at 2.21%, 5s of 8/2030 at 2.33%, 3.5s of 8/2030 at 2.47%, 5s of 8/2035 at 3.04% and 5s of 8/2045 at 4.12%, callable 8/2035.

Morgan Stanley priced for Connecticut (Aa2/AA-/AA/AA+/) $1.515 billion of GOs. The first tranche, $800 million of Series C bonds, saw 5s of 8/2026 at 2.45%, 5s of 2030 at 2.49%, 5s of 2035 at 3.10%, 5s of 2040 at 3.70% and 5s of 2045 at 4.15%, callable 8/2035.

The second tranche, $714.62 million of Series 2025D refunding bonds, saw 5s of 8/2026 at 2.45%, 5s of 2030 at 2.49% and 5s of 2035 at 3.10%, noncall.

BofA Securities priced for Texas (/AAA/AAA/) $657.79 million of GO water financial assistance bonds (State Water Plan). The first tranche, $383.235 million of Series 2025E bonds, saw 5s of 08/2026 at 2.29%, 5s of 2/2030 at 2.36%, 5s of 8/2030 at 2.39%, 5s of 2/2035 at 3.01%, 5s of 8/2035 at 3.09%, 5s of 8/2040 at 3.74%, 4.5s of 8/2045 at 4.45%, 4.625s of 8/2049 at par and 4.75s of 2/2056 at 4.74%, callable 8/2035.

The second tranche, $274.555 million of taxable Series 2025F bonds, saw all bonds priced at par, 3.866s of 8/2026, 3.952s of 2/2030. 3.982s of 8/2030, 4.489s of 2/2035, 4.509s of 8/2035, 4.959s of 8/2040, 5.315s of 8/2045 and 5.49s of 2/2056, callable 2/2035.

In the competitive market, the North Texas Municipal Water District (Aa2/AAA//) sold $276.965 million of regional wastewater system revenue refunding and improvement bonds to Wells Fargo, with 5s of 6/2026 at 2.39%, 5s of 2030 at 2.42%, 5s of 2035 at 3.10%, 5s of 2040 at 3.77%, 4.25s of 2045 at 4.45%, 4.5s of 2050 at 4.637% and 4.5s of 2055 at 4.672%, callable 6/2035.

The district (Aa1/AAA//) also sold $146.9 million of Upper East Fork wastewater interceptor system contract revenue refunding and improvement bonds to Wells Fargo, with 5s of 6/2026 at 2.49%, 5s of 2030 at 2.41%, 5s of 2035 at 3.09%, 5s of 2040 at 3.76%, 4.25s of 2045 at 4.423%, 4.625s of 2050 at 4.65% and 4.75s of 2055 at par, callable 6/2035. 

AAA scales
MMD’s scale was cut up to 10 basis points: 2.31% (+10) in 2026 and 2.21% (+10) in 2027. The five year was at 2.26% (+7), the 10-year was at 2.92% (+1) and the 30-year was at 4.26% (+2) at 3 p.m.

The ICE AAA yield curve was cut one to five basis points: 2.23% (+5) in 2026 and 2.17% (+5) in 2027. The five-year was at 2.24% (+5), the 10-year was at 2.92% (+2) and the 30-year was at 4.27% (+1) at 4 p.m.

The S&P Global Market Intelligence municipal curve saw large cuts on the front end of the curve: The one-year was at 2.28% (+8) in 2025 and 2.18% (+8) in 2026. The five-year was at 2.25% (+6), the 10-year was at 2.93% (+2) and the 30-year yield was at 4.27% (+2) at 3 p.m.

Bloomberg BVAL was cut two to 10 basis points: 2.22% (+10) in 2025 and 2.19% (+10) in 2026. The five-year at 2.25% (+7), the 10-year at 2.91% (+3) and the 30-year at 4.24% (+2) at 4 p.m.

Treasuries saw losses inside 10 years.

The two-year UST was yielding 3.659% (+5), the three-year was at 3.659% (+5), the five-year at 3.764% (+5), the 10-year at 4.171% (+2), the 20-year at 4.723% (+1) and the 30-year at 4.75% (flat) at the close.