Munis extend firmness, USTs see gains

Munis extended their firmness for the third straight session, as U.S. Treasuries saw gains throughout most of the curve and equities ended mixed.

The two-year muni-UST ratio Wednesday was at 66%, the five-year at 62%, the 10-year at 64% 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 65%, the five-year at 61%, the 10-year at 64% and the 30-year at 85% at a 4 p.m. read.

The Investment Company Institute Wednesday reported inflows of $407 million for the week ending Dec. 30, following $178 million of inflows the previous week.

Exchange-traded funds saw inflows of $1.379 billion after $1.712 billion of inflows the week prior, per ICI data.

Surprisingly, the expected surge in net supply last year did not elicit a major repricing in the muni market, said Pat Luby, head of municipal strategy at CreditSights.

Despite the headwind, the market performed "remarkably well," he said, noting, "current pricing of tax-exempt municipals relative to corporates [late last year], particularly in the short end of the curve, suggests that demand has remained robust, and the market successfully attracted the necessary inflows."

This year, net supply is expected to rise to $288 billion.

"While we see no immediate signs of weakening demand, it is important to note that individual investors remain the primary and most consistent source of support for the municipal market," Luby said. "Banks and insurance companies, priced out by demand from higher tax-rate investors, are largely absent as buyers."

If retail demand is pared, volatility could be pronounced, potentially prompting banks and insurers to re-enter the market, as the two have previously done during periods of extreme volatility. However, such participation would require a "meaningful shift" in relative value, he said.

Tax-exempt yields would need to cheapen substantially compared to corporates to appeal to institutions subject to the 21% federal tax rate, he said.

"If such conditions materialize, institutional demand would be significant," Luby said.

Adding muni credit risk to investment-grade portfolios offers banks and insurers' diversification that they had "limited opportunity to capture over the past decade," he said.

"For now, direct and indirect retail demand remains concentrated in the front end of the curve and we expect this trend to persist into 2026," Luby said.

"However, given that more than half of new issue volume tends to be due in more than 10 years, we anticipate a bifurcated market, with strong demand and tight spreads in the front end, contrasted with weaker demand and wider spreads in the long end, where yields and spreads will need to cheapen to attract buyers, particularly for large deals from frequent borrowers," he said.

The projected increase in supply, particularly in longer maturities, will likely "weigh on performance at the long end of the curve, dragging down municipal index returns," Luby said.

However, long-duration underperformance could lead to "attractive entry points for income-oriented investors, and that a cheapening of the long end should steepen the curve modestly, offering incremental performance potential for investors positioned to benefit from roll-down," he said.

In the primary market Wednesday, Stifel priced for Broomfield, Colorado, (Aa2///) $111.1 million of sewer activity enterprise revenue and refunding bonds, with 5s of 12/2026 at 2.41%, 3s of 2031 at 2.43%, 5s of 2036 at 2.92%, 5s of 2041 at 3.46% and 5s of 2045 at 3.98%, callable 12/1/2035.

In the competitive market, the Florida Department of Transportation (Aa2/AA/AA/) sold $232.995 million of turnpike revenue bonds, Series 2026A, to BofA Securities, with 5s of 7/2026 at 2.34%, 5s of 2031 at 2.36%, 5s of 2036 at 2.80%, 5s of 2041 at 3.40%, 5s of 2046 at 4.08%, 5s of 2051 at 4.55% and 4.5s of 2055 at 4.562%, callable 7/1/2035.

AAA scales
MMD's scale was bumped two to four basis points: 2.32% (-4) in 2027 and 2.28% (-4) in 2028. The five-year was 2.28% (-4), the 10-year was 2.67% (-4) and the 30-year was 4.21% (-2) at 3 p.m.

The ICE AAA yield curve was bumped two to five basis points: 2.31% (-4) in 2027 and 2.25% (-5) in 2028. The five-year was at 2.26% (-5), the 10-year was at 2.67% (-4) and the 30-year was at 4.14% (-2) at 4 p.m.

The S&P Global Market Intelligence municipal curve saw bumped two to three basis points: The one-year was at 2.33% (-3) in 2027 and 2.29% (-3) in 2028. The five-year was at 2.30% (-3), the 10-year was at 2.68% (-3) and the 30-year yield was at 4.17% (-2) at 3 p.m.

Bloomberg BVAL was bumped two to five basis points: 2.35% (-3) in 2027 and 2.30% (-3) in 2028. The five-year at 2.25% (-4), the 10-year at 2.60% (-4) and the 30-year at 4.09% (-3) at 4 p.m.

UST gains throughout most of the curve.

The two-year UST was yielding 3.466% (flat), the three-year was at 3.521% (-1), the five-year at 3.692% (-2), the 10-year at 4.137% (-4), the 20-year at 4.757% (-5) and the 30-year at 4.817% (-5) near the close.

Primary to come
The New York State Thruway Authority (A1/A//) is set to price Thursday $847.835 million of general revenue junior indebtedness refunding obligations, Series 2026A. Goldman Sachs (GS).

The Black Belt Energy Gas District (/AA-//) is set to price $814.6 million of gas project revenue bonds, 2025 Series F. J.P. Morgan.

The Tennessee Energy Acquisition Corp. (Aa3///) is set to price $767.545 million of gas project revenue bonds, Series 2026A. Goldman Sachs (GS).

The Oregon Department of Transportation (Aa2/AA+/AA+/) is set to price Thursday $223.695 million of highway user tax revenue subordinate lien refunding bonds, Series 2026A. Wells Fargo (WFC).

The Omaha Public Power District (A1/A//) is set to price Thursday $168.005 million of separate electric system revenue refunding bonds (Nebraska City 2), 2026 Series A. Wells Fargo (WFC).

Competitive
Colorado is set to sell $560 million of education loan program tax and revenue anticipation notes at 11 a.m. Eastern Thursday.