Despite volatility, macroeconomic and political uncertainty, munis outperform

Triple-A yield curves were little changed Friday ahead of an $8.4 billion new-issue calendar while U.S. Treasuries saw small losses across the curve and equities were in the red as mixed economic data, hawkish Fedspeak and major announcements on how President-elect Donald Trump's new administration may take form hangs over.

Municipal outperformance to U.S. Treasuries has been the theme, surprising some market participants given an election outcome that is less than favorable for the asset class from a policy and tax perspective, in addition to further macroeconomic uncertainty that has spurred on UST losses.

Federal Reserve Chair Jerome Powell's description of inflation data and the path for monetary policy during a speech at the Dallas Fed Thursday "came across as hawkish relative to his recent comments," said Peter DeGroot, head of municipal strategy at J.P. Morgan. And while similar to language he used in his Q&A after the FOMC meeting, J.P. Morgan thinks "it carries additional importance" given it was included in the prepared remarks.

"Our economists think these comments open the door to a more gradual pace of easing as soon as January, but they still think the Fed is likely to cut next month," DeGroot said.

Barclays (JJCTF) economists have retained their baseline call for a 25-basis-point rate cut in December thus far, said Mikhail Foux, managing director and head of municipal research at the firm, but he added, "it remains a close call, with risks increasingly skewing towards a likely pause."

As headline volatility continues around the Fed and the transition to the Trump administration, municipals have largely stayed in their own lane.

The flip of the calendar to November finds the municipal market "in far better technical shape, with an attractive backdrop through at least year-end," DeGroot said.

The outperformance has municipals in the black at +0.65% in November and +1.46% year-to-date, per the Bloomberg Municipal Index, compared to USTs at -0.72% in November and +0.64% in 2024.

It has also led muni-to-UST ratios to become three to four points richer across the curve, he said.

"With long-dated municipal market rates near year-to-date highs, and a favorable tax-exempt net-supply backdrop, we like the performance profile over the balance of the year and into 1Q25, given some stability in the rates market," DeGroot said.

The two-year municipal to UST ratio Friday was at 61%, the three-year at 60%, the five-year at 62%, the 10-year at 67% and the 30-year at 82%, according to Refinitiv Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 61%, the three-year at 60%, the five-year at 61%, the 10-year at 66% and the 30-year at 82% at 4 p.m.

However, with 10- and 30-year muni to UST ratios at these levels, Foux said, there is "much less juice in tax-exempts at the moment."

"It is probably not the right time to start taking profits, but if the market gets ahead of itself between now and year-end, with 10-year ratios falling to the low 60s, to us it would make sense to get lighter going into 2025," he said.

Pressure could grow as issuance does. The forward calendar is building as governments move to bring deals ahead of an uncertain macroeconomic and political environment in 2025. Bond Buyer 30-day visible supply sits at $12.51 billion.

"Supply is expected to start picking up, and next week and the first several weeks in December are expected to be heavy again; even the 30-day visible pipeline has finally started showing some signs of life," Foux said.

The new-issue slate next week is expected to total just over $8.4 billion, led by the high-yield (Ba3//BB-/) $1 billion of United Airlines, Inc. Terminal Improvement Projects deal in Houston.

High-grade Delaware Transportation Authority (Aaa/AA+//) leads the competitive calendar with $150.455 million of transportation system senior revenue bonds Tuesday.

Chicago (/A+/A+/AA-) is set to price Tuesday $139.49 million of second lien wastewater transmission revenue refunding bonds, just as the City Council voted down a proposed $300 million property tax increase that Mayor Brandon Johnson had called for to help bridge a $982 million budget gap there. KBRA put the city's rating on watch for downgrade this week.

More deals are being announced heading into year-end, including a $1.38 billion Connecticut special tax obligation bond deal for transportation projects expected to price on Dec. 3. Hawaii will head to market in early December with its double-A category ratings affirmed as it prices $750 million of taxable general obligation bonds.

DeGroot said the tax-exempt net-supply projections for November "are a far more supportive -$17 billion versus a record +$23 billion in last month."

"The more supportive tax-exempt supply backdrop and our call for lower absolute yields by year-end 2024 and beyond should drive outperformance in the municipal market through year-end and into 2025," he said.

AAA scales
Refinitiv MMD's scale was unchanged: The one-year was at 2.79% and 2.63% in two years. The five-year was at 2.64%, the 10-year at 2.94% and the 30-year at 3.79% at 3 p.m.

The ICE AAA yield curve was little changed: 2.91% (unch) in 2025 and 2.67% (unch) in 2026. The five-year was at 2.65% (unch), the 10-year was at 2.94% (+1) and the 30-year was at 3.75% (unch) at 4 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.84% in 2025 and 2.65% in 2026. The five-year was at 2.64%, the 10-year was at 2.93% and the 30-year yield was at 3.73% at 4 p.m.

Bloomberg BVAL was little changed: 2.82% (unch) in 2025 and 2.63% (unch) in 2026. The five-year at 2.67% (unch), the 10-year at 2.96% (unch) and the 30-year at 3.69% (unch) at 4 p.m.

Treasuries saw losses.

The two-year UST was yielding 4.31% (+2), the three-year was at 4.278% (+1), the five-year at 4.311% (+2), the 10-year at 4.443% (+2), the 20-year at 4.725% (+3) and the 30-year at 4.625% (+4) at the close.

Negotiated calendar:
Houston is set to price Tuesday $1 billion of United Airlines, Inc. Terminal Improvement Projects airport system special facilities AMT revenue bonds, (Ba3//BB-/), serials 2033-2039. BofA Securities.

The California Community Choice Financing Authority (A1///) is set to price $725 million of green clean energy project revenue bonds, Series 2024G. Goldman Sachs & Co. LLC.

The Airport Authority of Omaha, Nebraska, (A1/AA-//) is set to price Wednesday $319.45 million of airport facilities AMT revenue bonds, Series 2024, serials 2025-2044, terms 2049, 2054. BofA Securities.

Ector County, Texas, (/AA-/AA-/) is set to price $318.765 million of certificates of obligation, Series 2024, serials 2026-2050. Frost Bank.

The Pennsylvania Housing Finance Agency (Aa1/AA+//) is set to price Wednesday $248.56 million of single-family mortgage non-AMT social revenue bonds, Series 2024-147A, serials 2025-2036, terms 2039, 2044, 2049, 2053, 2054. Jefferies LLC.

Austin, Texas, (Aa3/AA-/AA-/) is set to price Tuesday $245.94 million electric system revenue refunding bonds, Series 2042, serials 2028-2046, terms 2050, 2054. J.P. Morgan Securities LLC.

The Tennessee Housing Development Agency is set to price Wednesday $224.275 million of residential finance program bonds, consisting of $99.265 million of non-AMT social bonds and $125.01 million of non-AMT social bonds. Raymond James & Associates, Inc.

The Katy Independent School District (Aaa/AAA//) is on the day-to-day calendar with $220.28 million of unlimited tax refunding bonds PSF guarantee. BOK Financial Securities, Inc.

The Wisconsin Housing and Economic Development Authority (Aa2/AA+//) is set to price Tuesday $215 million of home ownership non-AMT social revenue bonds, serials 2025-2036, terms 2039, 2044, 2051, 2055. RBC Capital Markets.

The North Dakota Housing Finance Agency (Aa1///) is set to price Wednesday $195 million of home mortgage finance program housing finance program non-AMT social bonds, serials 2026-2036, terms 2039, 2044, 2049, 2052, 2055. RBC Capital Markets.

The East Montgomery County Improvement District, Texas, (/AA//) is set to price Tuesday $165.52 million of sales tax revenue bonds, insured by Assured Guaranty Inc., serials 2027-2054. Raymond James & Associates, Inc.

Chicago (/A+/A+/AA-) is set to price Tuesday $139.49 million of second lien wastewater transmission revenue refunding bonds, serials 2026-2028, 2030-2039. Cabrera Capital Markets, LLC.

The Cabarrus County Development Corp., North Carolina, (Aa1/AA+/AA+/) is set to price Wednesday $135.655 million of limited obligation bonds, serials 2025-2044. BofA Securities.

The Conroe Independent School District, Texas, (Aaa/AAA//) is on the day-to-day calendar with $129.49 million of unlimited tax refunding bonds, PSF guarantee, serials 2026-2036. Jefferies LLC.

The Public Finance Authority is set to price Tuesday $124.835 million of nonrated Million Air Three LLC general aviation facilities project special facility revenue bonds, consisting of $47.485 million of tax-exempt AMT Series 2024A, terms 2030, 2035, 2046, and $77.35 million of taxable Series 2024B, terms 2035, 2054. Raymond James & Associates, Inc.

Garland, Texas, (A1//AA-/) is set to price Wednesday $109.66 million of electric utility system revenue refunding bonds. Wells Fargo Bank, N.A. Municipal Finance Group.

The New Jersey Educational Facilities Authority (A2/A-/A/) is set to price Wednesday $98.425 million of higher education capital improvement fund issue revenue refunding bonds, serials 2025-2033. Siebert Williams Shank & Co., LLC.

The Danville Multi-School Building Corp., Indiana, (/AA+//) is set to price Tuesday $96.955 million of ad valorem property tax first mortgage bonds, Indiana State Aid Intercept Program, serials 2025-2044. Stifel, Nicolaus & Company, Inc.

Competitive:
The Delaware Transportation Authority (Aaa/AA+//) is set to sell $150.455 million of transportation system senior revenue bonds at 10:30 am eastern Tuesday.

The Finance Authority of Santa Barbara, California, (Aa2/AA//) is set to sell $124.222 million of public safety and park project lease revenue bonds at 11:15 am eastern Tuesday.