Munis ended 2025 firmer in spots, in the black

Munis were slightly firmer in spots to close out 2025, as U.S. Treasuries were weaker.

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 69%, 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 $177 million for the week ending Dec. 23, following $680 million of inflows the previous week.

Exchange-traded funds saw inflows of $1.712 billion after $674 million of inflows the week prior, per ICI data.

Municipal bond issuers are on tap to sell about $6 billion of new issues in early January, but there should be plenty of money from maturing issues and interest payments to easily absorb that amount, as well as volume going forward, says Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.

"January's estimated principal redemptions are $18 billion (per CreditSights), but interest payments are a substantial portion above that total," she said. "Based on premiums required in traditional 5% coupons in the front half of the curve, many reinvestments are likely using some of the interest portion. Several other months include estimates with the interest component representing nearly half of principal credits ? an aspect that may become relevant in a higher-supply environment."

Olsan noted performance in the various segments of the investment-grade spectrum was fairly consistent in 2025, marking a huge departure from 2024, when lower-rated bonds outperformed higher-grade bonds by a substantial margin.

"Performance this year among the investment-grade sectors has been fairly steady, ranging from 4.10% to 4.20%," she said. "This uniformity in returns is a stark contrast to last year, when single-A- and Baa-rated indices outperformed high-grade bonds by 100?200 basis points. One catalyst may be the steeper curve conditions this year, which have rewarded extensions with favorable high-quality yields."

The minutes of the Federal Open Market Committee's December meeting "reveal increasing division amongst Fed members," said Lauren Saidel-Baker, an economist at ITR Economics. "As the careful balancing act between dueling sides of the dual mandate becomes more fraught, divergence is increasing. Critically, the balance of priorities appears to be shifting away from the labor market side of the mandate and toward inflation concerns."

Clearly, she said, "there is no single, unified outlook," which means future policy will be data-dependent.

The voter rotation in January appears to favor few or no cuts, Saidel-Baker said. Three of the four incoming voters "have previously expressed concerns or outright opposition to recent cuts."

Still, the "loss of Fed independence" represents the greatest risk, she noted. President Donald Trump's "pick for incoming Fed chair will almost certainly be more dovish than current Chair [Jerome] Powell," Saidel-Baker said. "While the staggered structure of voting seats protects the institution from rapid change, political pressures on interest rate policy are prevalent."

Will Compernolle, macro strategist at FHN Financial, says the bar for a rate cut at the Fed's January meeting appears high, with "a few of those who supported lowering the policy rate at [the December meeting indicating] that decision was finely balanced or that they could have supported keeping the target range unchanged."

The minutes also make it clear the Fed is ready and willing to use reserve management purchases (RMPs) to support money markets, he added. "FOMC participants agree the Fed's System Open Market Account (SOMA) portfolio needs to increase to accommodate both trend growth in the demand for bank reserves and the significant seasonal variation in the demand for reserves. In plain English, the banking system needs more liquidity as the economy grows, but it also needs more at times like the end of the year and around the mid-April tax deadline."

"The December minutes reflect the committee's challenge in agreeing on a definitive course of policy action," KBRA Chief Strategist?Van Hesser said. "While there remains evidence that rates remain restrictive, the economy has proven to be resilient, keeping unemployment low."

In future meetings, Hesser said, "members need to reconcile the prospect of persistent price pressure likely to be fueled by additional fiscal stimulus with a jobs market that shows little growth in an economy where growth is concentrated in one sector, technology. Accordingly, credible cases can be made on each side of the 'cut or hold' debate. That sounds to us like we are close to neutral and that the path of the future policy remains, wait for it, data dependent."

AAA scales
MMD's scale was bumped two basis points between two- to eight-years: 2.46% (unch) in 2026 and 2.39% (-2) in 2027. The five-year was 2.41% (-2), the 10-year was 2.76% (unch) and the 30-year was 4.24% (unch) at 1 p.m.

The ICE AAA yield curve was bumped up to a basis point: 2.44% (-1) in 2026 and 2.39% (-1) in 2027. The five-year was at 2.36% (-1), the 10-year was at 2.75% (-1) and the 30-year was at 4.18% (unch) at 1 p.m.

Bloomberg BVAL was unchanged: 2.47% in 2025 and 2.42% in 2026. The five-year at 2.37%, the 10-year at 2.71% and the 30-year at 4.13% at 1 p.m.

Treasuries were weaker.

The two-year UST was yielding 3.47% (+2), the three-year was at 3.532% (+3), the five-year at 3.717% (+4), the 10-year at 4.156% (+3), the 20-year at 4.78% (+3) and the 30-year at 4.833% (+3) at 1:15 p.m.

Jessica Lerner contributed to this report.