Munis weaker on the front end ahead of smaller new-issue calendar

Municipals were weaker in spots on the front end of the curve Thursday, as U.S. Treasury yields rose slightly and equities ended down.

The two-year muni-UST ratio Thursday was at 65%, the five-year at 63%, the 10-year at 69% and the 30-year at 89%, according to Municipal Market Data’s 3 p.m. EDT read. ICE Data Services had the two-year at 65%, the five-year at 63%, the 10-year at 70% and the 30-year at 89% at a 3:15 p.m. read.

Munis are “not unique in the sense that valuations are pretty stretched, and the market just doesn’t seem to be on either side of the equation [of] pricing in any real risk for slower economic conditions,” said Adam Congdon, a director at Payden & Rygel.

The rate side, though, is at least pricing in a soft landing with terminal rates around 3%, potentially a little bit on the higher end of where most consider neutral to be, but not pricing in any probability of heading into easing territory, he said.

The credit markets, which are in “post-Trump credit euphoria” where nothing will derail this, are even pricing in less than that, at a time when money market assets are still really elevated, Congdon said.

This has been a record year, with weekly municipal supply materially higher than the five-year average, even during periods when supply was expected to slow down, such as the summer months, said John Flahive, head of investment solutions and co-head of municipal bonds at Insight Investment.

At the start of the year, some thought supply would be front-loaded to get ahead of the One Big Beautiful Bill, which could have either fully eliminated tax-exempt debt or curtailed it, he said.

However, that is no longer the case as the average weekly issuance is at least $10 billion, Flahive said, though some weeks are larger, like the nearly $13 billion this week and some are smaller, like the $4.8 billion on tap for the holiday-shortened week next week.

“I don’t think that that slows down,” he said of the rapid pace of issuance. “If we get through with the cash flows that we’re seeing recently, that will be able to handle it.”

The only part of the curve that will continue to struggle is the longest part, according to Flahive.

“While we’ve had a little bit of reprieve, I think that the muni curve will continue to steepen, and I wouldn’t doubt that we stay above that 200 basis points just because the natural buyers,” he said.

Currently, long-end ratios are around 90%, and at these levels, there are not enough natural buyers to take it all up, Flahive said.

The market needs crossover buyers, which supported the market during the summertime when long-end ratios were 95% to 97%, he said.

The long end will continue to struggle until the market enters a better seasonal period, such as October, Flahive said.

At the end of the year and into January, the overall tone of the market is expected to improve, which will be an encouraging sign, he noted.

Some issuance predictions for next year are expected to hit $600 billion, which may be higher than 2025’s record total, Flahive said.

There’s a tremendous amount of debt, and unfortunately, it’s usually issued in the long end of the curve, he said.

That will make things a little bit more difficult for the next couple months, and during these pockets of seasonality, the long end will struggle, Flahive said.

In the primary market Thursday, Jefferies priced for the Albany Capital Resource Corp. (A2/A//) $375.405 million of tax-exempt revenue bonds (Albany Medical Center Hospital project), Series 2025A, with 5s of 5/2031 at 2.81%, 5s of 2035 at 3.33%, 5s of 2040 at 4.06%, 5.25s of 2045 at 4.49%, 5.25s of 2050 at 4.71% and 5.5s of 2055 at 4.71%, callable 5/1/2035.

Fund flows
Investors added $966 million to municipal bond mutual funds in the week ended Wednesday, following $1.084 billion of inflows the prior week, according to LSEG Lipper data.

High-yield funds saw inflows of $268.5 million compared to inflows of $454 million the previous week.

Tax-exempt municipal money market funds saw inflows of $2.899 billion for the week ending Oct. 7, bringing total assets to $140.117 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 2.40%.

Taxable money-fund assets saw $68.343 billion added, bringing the total to $7.202 trillion.

The average seven-day simple yield was at 3.80%.

The SIFMA Swap Index was at 2.70% on Wednesday compared to the previous week’s 2.95%.

AAA scales
MMD’s scale is cut on the front end: 2.40% (unch) in 2026 and 2.34% (+2) in 2027. The five-year was 2.35% (+3), the 10-year was 2.88% (unch) and the 30-year was 4.19% (unch) at 3 p.m.

The ICE AAA yield curve was little changed: 2.39% (+1) in 2026 and 2.33% (+1) in 2027. The five-year was at 2.34% (+1), the 10-year was at 2.89% (unch) and the 30-year was at 4.21% (unch) at 3:15 p.m.

The S&P Global Market Intelligence municipal curve was cut on the front end: The one-year was at 2.40% (unch) in 2025 and 2.34% (+3) in 2026. The five-year was at 2.34% (+3), the 10-year was at 2.88% (-1) and the 30-year yield was at 4.19% (unch) at 3 p.m.

Bloomberg BVAL was cut eight years and in: 2.34% (+5) in 2025 and 2.31% (+5) in 2026. The five-year at 2.29% (+2), the 10-year at 2.86% (unch) and the 30-year at 4.20% (unch) at 3:15 p.m.

Treasuries were slightly weaker.

The two-year UST was yielding 3.596% (+2), the three-year was at 3.612% (+2), the five-year at 3.739% (+2), the 10-year at 4.145% (+3), the 20-year at 4.697% (+3) and the 30-year at 4.73% (+2) at 3:15 p.m.