Munis steady as new issue supply drops off for year-end

Munis were steady Friday as U.S. Treasuries weakened slightly and equities ended up.

The two-year muni-UST ratio Friday was at 69%, the five-year at 66%, the 10-year at 67% and the 30-year at 88%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 70%, the five-year at 65%, the 10-year at 67% and the 30-year at 88% at a 4 p.m. read.

Most of the muni AAA curve did not move this week, continuing the theme of the last seven weeks, while UST market volatility persisted, said BofA strategists.

With November's consumer price index print, which showed inflation was cooling, a year-end rally may be possible even with less than two weeks to close out 2025, they said.

"Of course, that is mostly dependent on how much Treasury yields can fall when the year ends, but also on whether muni/Treasury ratios can compress further," BofA strategists said.

Supply for the final two weeks of the year will be virtually nonexistent, with only one deal, $24.46 million of taxable multi-family/project bonds from the Colorado Housing and Finance Authority, on the calendar for next week.

This comes at a time when investors received good news on inflation, BofA strategists said.

Next year, "January might see heavy enough supply, while redemptions might be a bit lower than in previous years, which would make them harder to absorb," said Barclays (BCS) strategists led by Mikhail Foux.

For the first two months of the year, BofA strategists expect $77 billion of volume and $110 billion of principal redemption and coupon payments.

Ten-year-plus muni-UST ratios are somewhat low, but ratios at one- to three-year part of the curve continue to look somewhat cheap, they said.

Short-end ratios historically tend to look "cheap during an easing cycle unless the end of the easing program is within sight," BofA strategists said.

Today's cheapness of munis in the short end hints Fed rate cuts are still far from over, despite last week's mixed Fed statements, they said.

Despite an uncertain macro environment, the muni market seems not to have an issue absorbing ample supply without moving the market over the past seven weeks, BofA strategists said.

Dealer inventories ? which tend to be relatively high in December when compared to a year's average levels ? are near this year's lows. The low dealer inventories likely reflect a "disbelief " in a potential inflation decline, they said.

Now that CPI "surprised on the downside, low dealer inventories should also support our view of a good market over the final two weeks of 2025," they said.

Continued performance will clearly require the follow-through in macro data during the start of the year, including employment and CPI reports in January, BofA strategists said.

Next year's trading environment may be complicated by tax-exempts having yet to become richer once more, and fund flows subsiding a bit, said Barclays (BCS) strategists.

"That said, some states (California, New York, Illinois and Indiana) should see positive technicals due to heavier bond maturities," they said.

AAA scales
MMD's scale was unchanged: 2.46% in 2026 and 2.41% in 2027. The five-year was 2.43%, the 10-year was 2.76% and the 30-year was 4.24% at 3 p.m.

The ICE AAA yield curve was unchanged: 2.46% in 2026 and 2.43% in 2027. The five-year was at 2.39%, the 10-year was at 2.76% and the 30-year was at 4.20% at 4 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.46% in 2025 and 2.42% in 2026. The five-year was at 2.43%, the 10-year was at 2.76% and the 30-year yield was at 4.22% at 3 p.m.

Bloomberg BVAL was little changed: 2.48% (unch) in 2025 and 2.43% (unch) in 2026. The five-year at 2.37% (-1), the 10-year at 2.72% (unch) and the 30-year at 4.13% (unch) at 4 p.m.

Treasuries were slightly weaker.

The two-year UST was yielding 3.482% (+2), the three-year was at 3.529% (+3), the five-year at 3.692% (+3), the 10-year at 4.15% (+3), the 20-year at 4.785% (+3) and the 30-year at 4.828% (+2) near the close.