Higher yields entice January reinvestment capital

Municipals were little changed Monday as U.S. Treasury yields rose slightly out long and equities ended mixed.

With the steady tone Monday, muni to UST ratios fell slightly.

The two-year municipal to UST ratio Monday was at 65%, the five-year at 64%, the 10-year at 66% and the 30-year at 80%, according to Municipal Market Data's 3 p.m. EST read. ICE Data Services had the two-year at 65%, the five-year at 63%, the 10-year at 65% and the 30-year at 79% at 4 p.m.

"The confluence of a relatively rare December fixed-income market sell-off and a pickup in tax-related trading has pushed long-dated AAA benchmark tax-exempt rates close to one-year highs, setting up a better-than-typical entry point for January reinvestment capital," said J.P. Morgan strategists, led by Peter DeGroot.

"These opportunities will surface periodically throughout the year against heavy supply and the increasingly uncertain path for the Fed, evolving fiscal policy, and volatile Treasury market backdrop," they said.

It was a volatile end to 2024, said Daryl Clements, a municipal portfolio manager at AllianceBernstein (AB), noting "yields rose significantly during the third week of December, although the market did find some stability during the week of Christmas ? and some of that stability carried forward into last week."

Last week, two-year AAA muni yields fell six basis points, 10-year yields fell four basis points and 30-year yield declined three basis points, he said.

Munis saw gains of 0.61% last week but were down 1.46% in December. The market has contended with four straight weeks of outflows, though Clements believes they stemmed from tax-loss harvesting before yearend.

He does not anticipate a sustained period of outflows moving forward.

While supply in 2024 topped $500 billion, a record figure, issuance toward the end of the year was "extremely light," with only $4 billion issued during the last three weeks of last year, Clements said.

Investors will be greeted with $5.18 billion of supply in the first full week of 2025 as "market participants return from two consecutive holiday weeks, and are met with an unscheduled early market close on Thursday," J.P. Morgan strategists said.

While supply rebounds from the paltry issuance for most of December, it is still well below the $10 billion-plus weeks seen for an extended stretch in 2024.

Despite the slow start, market participants expect issuance in 2025 to be around $500 billion, but a few think volume will be much higher, mostly due to the expectation that some issuers will flood the market to get ahead of any changes to the tax exemption as the new Congress seeks to pay for the $4 trillion needed to replace the expiring Tax Cuts and Jobs Act.

This influx in supply may weigh on the market technical environment, Clements said.

"However, with the yield on the Index at 3.70% and improving relative valuations, the 2025 starting point looks attractive," he said.

With the Fed likely to keep cutting rates, though at a slower-than-expected pace, Clements said the muni yield curve should continue to normalize as short yields fall.

Income served as the primary driver of performance last year, and that trend is expected to continue this year, he said.

From a credit-quality perspective, he said "lower-rated bonds are likely to outperform once again ? although that outperformance is likely going to come from excess carry as opposed to significant spread compression."

Credit fundamentals will likely remain strong, "with the median rainy-day balance for 2025 representing 14.4% of general fund revenues ? the highest level on record," Clements said.

AAA scales
MMD's scale was unchanged: The one-year was at 2.77% and 2.76% in two years. The five-year was at 2.84%, the 10-year at 3.04% and the 30-year at 3.89% at 3 p.m.

The ICE AAA yield curve was little changed: 2.80% (-1) in 2026 and 2.78% (-1) in 2027. The five-year was at 2.79% (unch), the 10-year was at 3.00% (unch) and the 30-year was at 3.81% (unch) at 4 p.m.

The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.82% (unch) in 2025 and 2.77% (unch) in 2026. The five-year was at 2.82% (unch), the 10-year was at 3.00% (-2) and the 30-year yield was at 3.82% (unch) at 4 p.m.

Bloomberg BVAL was unchanged: 2.92% in 2025 and 2.77% in 2026. The five-year at 2.84%, the 10-year at 3.07% and the 30-year at 3.79% at 4 p.m.

Treasuries were slightly weaker throughout most of the curve.

The two-year UST was yielding 4.273% (-1), the three-year was at 4.318% (flat), the five-year at 4.422% (+1), the 10-year at 4.617% (+2), the 20-year at 4.905% (+2) and the 30-year at 4.839% (+3) at the close.

Primary to come
The San Diego Community College District (Aa1/AAA//) is set to price Thursday $850 million of Election of 2024 GO dedicated unlimited ad valorem property tax bonds, consisting of $700 million of Series A-1 and $150 million of Series A-2. RBC Capital Markets.

The Conroe Independent School District (Aaa/AAA//) is set to price Wednesday $588.815 million of unlimited tax school building bonds, Series 2025. Piper Sandler (PIPR).

The Board of Regents of the University of Texas System is set to price Wednesday $400 million of revenue financing system bonds, Series 2025A. RBC Capital Markets.

The Utah Housing Corp. (Aa2///) is set to price Wednesday $225 million of single-family mortgage bonds, consisting of $74 million of Series A non-AMT bonds, serials 2026-2037, terms 2040, 2045, 2050, 2055, 2055, and $151 million of Series B taxable, serials 2026-2036, terms 2040, 2045, 2050, 2055, 2055. BofA Securities.

The Ohio Water Development Authority (Aaa/AAA//) is set to price Wednesday $200 million of Fresh Water Revolving Fund water development revenue bonds, Series 2025A, serials 2027-2037, term 2044. Huntington Securities.

San Antonio (Aa1/AA+/AA/) is set to price Tuesday $183.045 million of water system junior lien revenue refunding bonds, Series 2025A, serials 2027-2039. Siebert Williams Shank.

The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price Wednesday $173 million of non-AMT mortgage revenue bonds, Series 2025A, serials 2026-2037, terms 2040, 2045, 2050, 2055, 2055. BofA Securities.

The Pittsburgh Water and Sewer Authority is set to price $144.25 million of water and sewer system revenue bonds, consisting of $131.405 million of first lien bonds, Series 2025A, and $12.845 million of subordinate bonds, Series 2025B. BofA Securities.,

The Public Finance Authority (//A+/) is set to price $131.475 million of Kahala Nui Project revenue bonds, Series 2025. HJ Sims.

The Kentucky Housing Corp. (Aaa///) is set to price Thursday $100 million of single-family mortgage revenue bonds, consisting of $40 million of Series A non-AMT bonds, serials 2026-2037, terms 2040, 2045, 2049, 2055, and $60 million of Series B taxables, serials 2026-2036, terms 2040, 2045, 2050, 2053, 2055. BofA Securities.

Competitive
The Tri-County Regional Vocation Technical School District, Massachusetts, is set to sell $140 million of GO school project loan chapter 70B bonds at 11 a.m. eastern Tuesday.