Munis steady, potential rate volatility this week

Munis were mostly steady Monday as U.S. Treasuries cheapened out long and equities ended up.

Despite the quiet start to the week for munis, all financial markets may feel a "heightened level of risk for rate volatility over the next few days," said Tim Iltz, a fixed income credit and market analyst at HJ Sims.

Over the weekend, news broke about the "U.S. central bank being subpoenaed by the Justice Department with threats of criminal indictment [which] has markets concerned about Federal Reserve independence," he said.

In response, Fed Chair Jerome Powell "insisted the investigation is just another of the President's attempts to force the Fed to lower rates beyond what the Federal Open Market Committee deems prudent," said FHN Financial Chief Economist Chris Low.

Powell has promised to "continue conducting policy to best achieve the Fed's Congressional mandate," he said.

Additionally, this week faces a slew of economic data, including December's consumer price index on Tuesday and November's producer price index on Wednesday, another potential source of rate volatility, Iltz said.

The two-year muni-UST ratio Monday was at 64%, the five-year at 60%, the 10-year at 64% and the 30-year at 87%, according to Municipal Market Data's 3 p.m. EDT read. ICE Data Services had the two-year at 63%, the five-year at 60%, the 10-year at 64% and the 30-year at 86% at a 4 p.m. read.

Last week, the muni market "came out of the gate hot" to start 2026, as the MMD curve rallied 11 to 13 basis points 10 years and in and four basis points out long, outperforming USTs by as much as 18 basis points up front, said Birch Creek strategists.

"Heavy January reinvestment cash, a lighter-than-expected new issue calendar, and reasonably attractive absolute yields all contributed to the demand," they said.

Strong separately managed account demand was seen, especially in the steepest part of the curve: 15- to 20-year maturities, Birch Creek strategists said.

"Inquiries were robust, with multiple buyers looking at all different types of structures, coupons, states, and sectors," they said.

With the outperformance, muni-UST ratios fell across most of the curve, with the five- to 10-year range of ratios moving to a "paltry" 60%," Birch Creek strategists said.

"This helped rebalance the market during the back half of the week as BWIC lists picked up and investors looked to monetize some of the recent performance," they said.

In particular, sale lists "surged for long duration and lower coupon bonds, suggesting some accounts would prefer to fade stronger weeks like this and instead deploy capital during heavy new issuance periods," Birch Creek strategists said.

January seems to have brought "more meaningful action" due to seasonality, said BofA strategists Yingchen Li and Ian Rogow, among others.

January is usually a month of strong performance in both absolute and relative terms, and last week's action likely suggests that is the case once more, they said.

"Indeed, we have good reasons to believe that good performance in January will extend to an even better one in February," BofA strategists said.

Both months will have lighter issuance than other months this year, with January supply forecast at $43 billion and February at $44 billion, they said.

"On the demand side, we forecasted a total of $48 billion of principal redemptions and coupon payments for January, and $63 billion for February; combined, that will clearly overwhelm supply, even without mutual fund inflows, which have been quite positive consistently," BofA strategists said.

"In our view, as long [as] there is no sizable bearish development in the market, mutual fund flows will stay positive," they said.

Investors added $1.454 billion to municipal bond mutual funds last week, following $751.8 million of inflows the prior week, according to LSEG Lipper data.

Positive flows were split relatively evenly between exchange-traded funds ($800 million) and open-end funds ($654 million), J.P. Morgan strategists led by Peter DeGroot said.

Overall, this is the seventh straight week of inflows, and the 14th week of gains in the last 15, though inflows ranged widely but were seen across all major categories, they said.

Principal redemptions may be higher than expected during the first quarter of 2026 due to higher refunding activities in the fourth quarter of 2025 ? as a percentage of total issuance ? than the previous three quarters, they said.

Overall, BofA strategists expect a strong January/February rally as long as there is no "bearish surprise" from the UST market side.

Muni ratios improved across the curve last week, showing strong demand conditions, according to BofA strategists.

AAA scales
MMD's scale was little changed: 2.28% (-1) in 2027 and 2.26% (-1) in 2028. The five-year was 2.27% (unch), the 10-year was 2.67% (unch) and the 30-year was 4.21% (unch) at 3 p.m.

The ICE AAA yield curve was little changed: 2.29% (-1) in 2027 and 2.23% (unch) in 2028. The five-year was at 2.25% (unch), the 10-year was at 2.66% (unch) and the 30-year was at 4.16% (+1) at 4 p.m.

The S&P Global Market Intelligence municipal curve saw small bumps on the short end: The one-year was at 2.28% (-3) in 2027 and 2.26% (-2) in 2028. The five-year was at 2.27% (-1), the 10-year was at 2.67% (unch) and the 30-year yield was at 4.17% (unch) at 3 p.m.

Bloomberg BVAL was little changed: 2.32% (-1) in 2027 and 2.28% (unch) in 2028. The five-year at 2.25% (unch), the 10-year at 2.60% (unch) and the 30-year at 4.09% (unch) at 4 p.m.

Treasuries were weaker out long.

The two-year UST was yielding 3.542% (+1), the three-year was at 3.597% (+1), the five-year at 3.765% (+1), the 10-year at 4.188% (+2), the 20-year at 4.785% (+3) and the 30-year at 4.841% (+3) near the close.

Primary to come
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to price Wednesday $1.5 billion of tax-exempt future tax secured subordinate bonds, Fiscal 2026 Series F, Subseries F-1. Ramirez.

The Nashville Metropolitan Airport Authority (/AA-/A+/AA/) is set to price Wednesday $1.276 billion of airport improvement revenue bonds, consisting of $460.94 million of Series 2026A bonds, $669.19 million of AMT Series 2026B bonds, $66.21 million of Series 2026C bonds and $79.91 million of AMT Series D bonds. BofA Securities.

The California Community Choice Financing Authority (A1///) is set to price Thursday $850 million of green clean energy project revenue bonds, consisting of $750 million of Series 2026A-1 and $100 million of Series 2026A-2. Morgan Stanley (MS).

The Dallas Independent School District (Aaa///AAA/) is set to price Wednesday $760.375 million of PSF-insured unlimited tax school building bonds, Series 2026A. Cabrera Capital Markets.

The New Hope Higher Education Finance Corp. (Aa3//AA-/) is set to price Tuesday $339.965 million of higher education revenue bonds (Texas Christian University Project), Series 2026A. Jefferies.

Boys Town Village, Nebraska, (/AA-//) is set to price Thursday $317.68 million of revenue bonds (Boys Town Projects. Stifel.

The Texas Department of Housing and Community Affairs (Aa1/AA+//) is set to price Tuesday $250 million of non-amt residential mortgage revenue and refunding bonds, Series 2026A. Morgan Stanley (MS).

The Maine Municipal Bond Bank (Aa2/AA//) is set to price Thursday $250million of transportation infrastructure revenue bonds (TransCap Program), consisting of $190 million of Series 2026A highway and bridge bonds and $60 million of taxable Series 2026A general transportation project bonds. BofA Securities.

Raleigh, North Carolina, (Aaa/AAA//) is set to price Wednesday $240.835 million of combined enterprise system revenue and revenue refunding bonds. BofA Securities.

Queen Creek, Arizona, (/AA/AA/) is set to price Thursday $236.585 million of certificates of participation. BofA Securities.

The Tarrant County Cultural Education Facilities Finance Corp. (Aa2/AA-//) is set to price Thursday $235.75 million of hospital revenue bonds (Baylor Scott & White Health Project), Series 2026E. J.P. Morgan.

The Wisconsin Housing and Economic Authority (Aa2/AA+//) is set to price $195 million of social home ownership revenue bonds, consisting of $85 million of non-AMT Series A bonds, $75 million of taxable Series B bonds and $35 million of non-AMT Series C variable rate demand bonds. RBC Capital Markets.

The Colorado Housing and Finance Authority (Aaa/AAA//) is set to price Tuesday $165 million of social Class I single-family mortgage bonds, consisting of $64.5 million of non-AMT Series A bonds, $58.5 million of taxable Series B-1 bonds and $42 million of taxable B-2 bonds. BofA Securities.

The Desert Community College District, California, (Aa1///) is set to price Tuesday $157.86 million of election of 2016 GOs. Raymond James.

The El Paso Independent School District, Texas, (Aaa//AAA/) is set to price Thursday $154.075 million of PSF-insured forward delivery unlimited tax refunding bonds, Series 2026A. RBC Capital Markets.

The Greenville Independent School District, Texas, (Aaa///) is set to price Tuesday $150 million of PSF-insured unlimited tax school building bonds. Jefferies.

The San Bernardino County Transportation Authority (/AAA/AAA/) is set to price Wednesday $132.78 million of sales tax revenue bonds, 2026 Series A. BofA Securities.

The College of the Law, San Francisco, (Baa1/AA//) is set to price Tuesday $132.115 million of BAM-insured taxable revenue bonds. Raymond James.

The Ohio Air Quality Development Authority (Baa3//BBB-/) is set to price Thursday $100 million of state of Ohio air quality revenue refunding bonds (Ohio Valley Electric Corp. Project), consisting of $50 million of Series 2026A and $50 million of Series 2026B. KeyBanc Capital Markets.

Competitive
The New York City Transitional Finance Authority (Aa1/AAA/AAA/) is set to sell $300 million of taxable future tax secured taxable subordinate bonds, Fiscal 2026 Subseries F-2, at 10:45 a.m., Eastern, Wednesday.

The Kansas Development Finance Authority (Aaa//AAA/) is set to sell $277.82 million of revolving funds revenue bonds, Series 2026SRF, at 11:15 a.m. Thursday.

Chandler, Arizona, (Aaa/AAA/AAA/) is set to sell $160 million of GOs at 11 a.m. Tuesday and $190 million of excise tax revenue obligations at noon Tuesday.