Munis little changed, USTs cheapen

Municipals were little changed Wednesday as U.S. Treasury yields rose and equities ended mixed.

The two-year muni-UST ratio Wednesday was at 67%, the five-year at 67%, 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 65%, the five-year at 69%, the 10-year at 74% and the 30-year at 94% at 4 p.m.

The Investment Company Institute reported Wednesday $618 million of inflows for the week ending June 25, following $244 million of inflows the previous week.

Exchange-traded funds saw inflows of $996 million after $1.033 billion of inflows the week prior, per ICI data.

While issuance is lackluster this week, overall supply is maintaining a record pace and demand is keeping up, particularly for shorter maturities and higher coupons, said Matt Fabian, a partner at Municipal Market Analytics.

“Even after five straight weeks of rally, the MMA valuation metrics keep showing buyers’ advantage almost throughout the entire curve,” he said. “This means underwriters have printed enough concessions into the new issue market to keep ‘demand’ strong vs offered levels.”

The market is also reacting to Congress’ deliberations about its massive tax and spending bill, which Republican leaders hope to see signed into law by the end of the week.

“At the start of the year, we expected the municipal market to be characterized by a tale of two halves, with concerns about the tax bill dominating the first half of the year and the market adjusting over the second half of the year,” said Cooper Howard, a fixed income strategist at Charles Schwab.

“We were correct that tax policy would take center stage in the first half of the year,” he said. “So here we are at halftime. Munis have limped into the locker room as the worst-performing major fixed income class and are now sipping on a Gatorade, looking to rehydrate, rest, and get back out there and turn things around during the second half.

After much fear and speculation about the fate of the muni tax exemption, the “One Big Beautiful” tax bill turned out to be “largely a non-event for most of the muni market,” Howard said, as the current version of the legislation keeps current tax brackets and doesn’t touch the tax exemption.

“It’s essentially status quo from a tax perspective,” he said. Though the bill “could impact credit quality of issuers in certain sectors longer term.”

Fabian said the current version of the tax bill “translates to substantially less medium-term federal spending on U.S. citizens’ health care … which may or may not be backfilled by the states.”

It’s currently unclear when proposed cuts will impact hospitals, or if Congress will ultimately find a way to replace that lost funding, Fabian said.

“For managers looking to take preemptive action on portfolio holdings, now is the time to inform investors of less certain credit and return outcomes while only slowly reallocating to better credits and more liquid securities,” he said.

Looking forward, Howard said he expects total muni returns to increase as issuance moderates, with fears about the tax exemption — that spurred record supply — off the table.

MFS Investment Management also predicted “compelling opportunities for muni investors” in the second half of the year.

Investment-grade and high-yield munis have both rebounded over 2% since the “sharp selloff in early April triggered by tariff uncertainty and budget negotiations,” they said. And, “investor sentiment has markedly improved” after multiple weeks of inflows into muni mutual funds.

“Notably, investor appetite is extending out the curve, with the 10- to 30-year muni spread reaching a decade high of 128bps — more than double that of comparable Treasuries — indicating renewed interest in duration risk,” MFS said.

Overall, muni credit quality remains strong, they said, noting that “Q1 2025 marked the 16th consecutive quarter of upgrades outpacing downgrades,” while the default rate remains a “negligible” 0.05%, state rainy day funds are at historic highs and tax revenues are rising.

On top of that stability, the “valuations are hard to ignore,” MFS said.

“With investment-grade muni yields near 4.00%, tax-equivalent yields for top earners can exceed 6.30%, offering compelling value compared to corporate bonds of similar or lower credit quality,” they said.

In the primary market Wednesday, Barclays priced for the Massachusetts Bay Transportation Authority (/AA+/AAA/AAA/) $978.31 million of senior sales tax bonds, 2025 Series B, with 5s of 7/2029 at 2.58%, 5s of 2030 at 2.66%, 5s of 2035 at 3.32%, 5s of 2040 at 4.02%, 5s of 2045 at 4.47%, 5.25s of 2050 at 4.67%, 5s of 2050 at 4.69%, 5.25s of 2055 at 4.74%, 5s of 2055 at 4.79% and 4.75s of 2055 at 4.90%, callable 7/1/2035.

AAA scales
MMD’s scale was bumped two basis points 12 years and in: The one-year was at 2.52% (-2) and 2.53% (-2) in two years. The five-year was at 2.61% (-2), the 10-year at 3.23% (-2) and the 30-year at 4.54% (unch) at 3 p.m.

The ICE AAA yield curve was little changed: 2.55% (-1) in 2026 and 2.47% (-1) in 2027. The five-year was at 2.64% (unch), the 10-year was at 3.17% (unch) and the 30-year was at 4.49% (+1) at 4 p.m.

The S&P Global Market Intelligence municipal curve was bumped up to two basis points: The one-year was at 2.52% (-2) in 2025 and 2.53% (-2) in 2026. The five-year was at 2.61% (-2), the 10-year was at 3.22% (-2) and the 30-year yield was at 4.53% (unch) at 4 p.m.

Bloomberg BVAL was narrowly mixed: 2.54% (-1) in 2025 and 2.56% (-1) in 2026. The five-year at 2.66% (-1), the 10-year at 3.16% (-1) and the 30-year at 4.47% (+1) at 4 p.m.

Treasuries saw losses.

The two-year UST was yielding 3.79% (+1), the three-year was at 3.769% (+3), the five-year at 4.871% (+4), the 10-year at 4.29% (+5), the 20-year at 4.826% (+5) and the 30-year at 4.82% (+6) just before the close.