Munis quiet ahead of Christmas holiday

Munis were steady ahead of the Christmas holiday, as U.S. Treasuries were firmer and equities were up near the close.

The two-year muni-UST ratio Wednesday was at 69%, the five-year at 65%, the 10-year at 67% and the 30-year at 88%, according to Municipal Market Data's 1 p.m. EDT read. ICE Data Services had the two-year at 68%, the five-year at 64%, the 10-year at 66% and the 30-year at 87% at a 1 p.m. read.

The Investment Company Institute Wednesday reported inflows of $680 million for the week ending Dec. 17, following $260 million of inflows the previous week.

Exchange-traded funds saw inflows of $649 million after $1.119 billion of inflows the week prior, per ICI data.

"A stagnant yield curve is resulting from supply having wound down and munis drawing steadiness from a likewise calm UST market," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.

Recent data offer a sense of "balance" with few surprises, she said.

Stronger gross domestic product and personal consumption figures could influence when the Federal Reserve next cuts rates, especially if further similar reports follow, she said.

"For munis, the coming week will be all about secondary flows and whatever yearend squaring takes place," Olsan said.

The first full week of January could see larger-than-expected supply, as about $2 billion is already scheduled to price, including a nearly $850 million deal from the New York State Thruway Authority, she said.

This January saw $26 billion issuance in the first two weeks, "eventually pressuring yields mid-month but with some recovery occurring into the end of the month," she said.

January 2025 saw the highest issuance figure on record for the month, $36.875 billion, according to LSEG data.

"Issuers may find comfortable access with hospitable yields and a fair redemption total for January (likely in excess of $25 billion between principal and interest)," Olsan said.

The 20-year MMD yield is at 3.93%, the highest-yielding level for the start of a year since 2011, she said.

"Credits such as Washington general obligation 5s due in 2046 (call 2035) are trading around 4.20% ? with [tax-equivalent yields] above 5.25% at the 21% corporate rate and at 7.00% for a 40% individual buyer," she said.

This year, the muni market's "defining theme" is its record-setting supply, said IR+M strategists in a report.

Issuance is at $569.014 billion year-to-date, according to LSEG. Many market participants expect supply to set another record in 2026, with most firms projecting volume of at least $600 billion.

"This steady expansion could ultimately push the size of the municipal market, which has long been anchored to $4 trillion, to the once-unthinkable $5 trillion mark," IR+M strategists said.

"Municipal performance continues to be shaped by the long-end's solid relative value versus corporates, elevated muni/Treasury ratios, and ? given its significant retail-buyer base ? an emphasis on interest rates and equities," they said.

"The muni market is not immune to AI's reach," IR+M strategists said, noting if the "so-called AI bubble bursts, equities could decline sharply, causing investors to opportunistically reallocate capital away from munis and into stocks."

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 1 p.m.

The ICE AAA yield curve was unchanged: 2.45% in 2026 and 2.43% in 2027. The five-year was at 2.40%, the 10-year was at 2.77% and the 30-year was at 4.19% at 1 p.m.

Bloomberg BVAL was little changed: 2.47% (-1) in 2025 and 2.43% (unch) in 2026. The five-year at 2.37% (unch), the 10-year at 2.71% (unch) and the 30-year at 4.13% (unch) at 1 p.m.

Treasuries saw small gains.

The two-year UST was yielding 3.505% (-3), the three-year was at 3.556% (-3), the five-year at 3.712% (-3), the 10-year at 4.131% (-3), the 20-year at 4.75% (-3) and the 30-year at 4.791% (-3) at 1:20 p.m.