Municipals outperform USTs to close out volatile month

Munis were little changed in the last session of the month and few deals of size priced while muni mutual funds saw inflows overall but high-yield faced the first outflows since mid-April. U.S. Treasuries were mixed and equities saw losses.

"The final session of October concludes what has been an upwardly trending curve all month as the correction brings attractive raw yields into play with momentum slanted toward buyers," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital, LLC.

The correction this month has translated into losses, with the Bloomberg Municipal Index in the red at -1.51% Thursday, which Olsan notes is the largest loss since October 2009 when it was down 2.09%.

"That pales in comparison to USTs," she noted, which was down 2.42% and U.S. corporate debt that was down 2.29% Thursday.

High-yield continues to outperform overall, with year-to-date gains of 5.82% but with losses of 1.54% in October through Thursday.

"Relative value will continue to be a focus but has held wide enough ? upper 60% range in the short end and 70% or higher past 10 years ? so as not to deter further commitments," she said.

The two-year municipal to UST ratio Thursday was at 65%, the three-year at 64%, the five-year at 65%, the 10-year at 70% and the 30-year at 87%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 66%, the three-year at 64%, the five-year at 65%, the 10-year at 71% and the 30-year at 84% at 3:30 p.m.

October's "price path has created wider spreads but also brought higher yields that are now in the range where a broader audience may begin to take notice," Olsan said, noting higher taxable equivalent yields at different tenors of the yield curve.

The short end of the curve has shifted into a yield range that will "encourage defensive positioning," she said. "A fixed one-year maturity in a single-A rated revenue bond is trading around 3.20%, a 30-basis-point adjustment from the end of September," she said, noting TEYs are in the mid-5% area, which is more than 100 basis points over USTs.

A substantial correction in the intermediate range has moved AAA-rated 10-year bonds above 3.00%, Olsan said, pointing to Washington State's most recent 10-year GO yielded 3.24% for a TEY of 5.40%.

"In the 20-year range where the curve begins to maximize itself, yields grow to around 3.75% in AA-rated bonds and are generating TEYs above 6.00%," she said. An example: "a trade of New York City GOs 5s due 2046 (call 2034) at 3.97% was 30 basis points above trading in the bond from early October."

In the primary market Thursday, the last sizable deals priced. BofA Securities priced $188.895 million of Fircrest Properties sustainability lease revenue bonds for the state of Washington DSHS Project (/A//), with 5s of 6/2028 yielding 2.97%, 5s of 2029 at 3.03%, 5s of 2034 at 3.44%, 5s of 2039 at 3.76%, 5s of 244 at 4.13% and 5.5s of 2049 at 4.30%, callable 6/1/2034.

In the competitive market, the Charleston County School District (MIG 1///) sold $115.065 million of general obligation bonds to BofA Securities, with 5s of 3/2025 at 3.25%, non-call. South Carolina SD Credit Enhancement insured.

While October supply came in at the highest levels for any month this year at $56 billion-plus, issuance drops dramatically from here, with Bond Buyer 30-day visible supply at $3.77 billion, and few deals of size on the calendar next week as all eyes turn to Tuesday's election.

Fund flows
Inflows continued this week as LSEG Lipper reported investors added $659 million to municipal bond mutual funds for the week ending Wednesday, compared to $514.9 million of inflows the prior week. This marks 18 straight weeks of inflows.

High-yield funds saw outflows of $64.4 million compared with inflows of $271.9 million the week prior. The outflows mark the first time since April 17 that high-yield funds were in the red and mark only the second time this year.

Long-term funds saw $361 million of inflows, intermediate-term funds saw $301 million, recording the largest share of inflows, while short-term funds saw $26 million, noted J.P. Morgan's Peter DeGroot. The week's inflows were dominated by municipal exchange-traded funds at $625 million, he said, along with modest capital into open-end funds at $34 million.

DeGroot said the firm's own observations "show even higher inflows into a monthly reporting ETF over the weekly period, so Lipper's headline figure is likely understated to some degree."

Money market funds, meanwhile, reported $2.518 billion of inflows in the latest reporting week, with total assets under management at $133.737 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 3.12% from 3.28% the prior week.

The SIFMA Swap Index fell to 3.24% Wednesday compared to the previous week's 3.51%.

AAA scales
Refinitiv MMD's scale was unchanged: The one-year was at 2.85% and 2.69% in two years. The five-year was at 2.68%, the 10-year at 3.01% and the 30-year at 3.87% at 3 p.m.

The ICE AAA yield curve was unchanged: 2.95% in 2025 and 2.71% in 2026. The five-year was at 2.69% , the 10-year was at 3.00% and the 30-year was at 3.79% (unch) at 4 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.90% in 2025 and 2.73% in 2026. The five-year was at 2.71%, the 10-year was at 3.01% and the 30-year yield was at 3.80% at 4 p.m.

Bloomberg BVAL was unchanged: 2.86% (unch) in 2025 and 2.67% (unch) in 2026. The five-year at 2.71% (unch), the 10-year at 3.02% (unch) and the 30-year at 3.81% (-1) at 4 p.m.

Treasuries were mixed.

The two-year UST was yielding 4.162% (+1), the three-year was at 4.125 (+1), the five-year at 4.146% (+2), the 10-year at 4.28% (+2), the 20-year at 4.599% (-1) and the 30-year at 4.476% (flat) at the close.