Shorter term munis firmer, USTs little changed after CPI

Munis were a touch firmer on the front end of the curve but steady in the belly and out long. U.S. Treasuries were little changed and equities ended down after Tuesday's consumer price index report suggested the Federal Reserve will hold rates steady at its next meeting.

"The bond market breathed a sigh of relief this morning as the CPI inflation numbers came in a tad weaker than expected," said John Kerschner, global head of securitised products and portfolio manager at Janus Henderson Investors. "This was the first non-polluted inflation number since September due to the government shutdown."

Year-over-year inflation dropped to the lowest rate since May 2025, he said. Core remained at 2.6%. "What this tells the market is that inflation continues to move lower, albeit at a somewhat glacial pace," Kerschner said.

A January rate cut won't happen, he said, and the market "is waiting for other economic data before drawing any major conclusions."

The two-year muni-UST ratio Tuesday was at 64%, the five-year at 61%, 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 63% and the 30-year at 86% at a 4 p.m. read.

The new-issue calendar is off to a slower start than last year, though it's still early January, said Matt Fabian, president of Municipal Market Analytics

The slowdown in issuance may stem from "intense headline risks developing both internationally and domestically," leading some issuers to pause before tapping the capital markets a bit for fear of "mid-sale corrections/shocks," he said.

MMA still forecasts issuance upward of $600 billion for the year, as "the risks of waiting months or longer to borrow seem to outweigh those of near-term tumult," Fabian said.

While market reaction had been muted through Tuesday, longer-term yields could rise if the situation with Federal Reserve Chair Jerome Powell escalates, as the loss of Fed independence would send expectations for inflation higher, thereby driving longer-term yields higher, said Cooper Howard, director of fixed income research and strategy at Charles Schwab (SCHW).

This could lead to increased borrowing costs, he noted.

Additionally, "the killing of another U.S. citizen by ICE, accelerating threats against Greenland, SCOTUS' ruling on tariff legality (on Wednesday?), maybe imperiled Congressional appropriation talks, the weakening dollar, etc., together undermine certainty generally; borrowing earlier and larger is reasonably a risk-reducing strategy," Fabian said.

Elsewhere, flows into separately managed accounts were strong last year, while muni mutual funds and exchange-traded funds also saw positive fund flows, said Adam Stern, Breckenridge's co-head of research.

"Demand was largely consistent throughout the year and the market absorbed another year of heavy supply despite reduced reliance on institutional buyers," he said, noting banks and insurers were net sellers of munis most of last year.

A similar demand picture is expected this year, Stern said.

For one, following multiple years of strong equity returns, retail investors are now underweight munis compared to previous years. Some investors are likely to rebalance their portfolios, he said.

Secondly, liquidity keeps improving for small lot sizes, which "underpin many lower-balance SMAs," Stern said.

Better liquidity has emerged amid reduced market participation by institutional investors, suggesting advances in algorithmic trading, coupled with solid credit fundamentals, have led to a more durable demand structure, he said.

Lastly, aging U.S. demographics and growing investor preference for SMAs are tailwinds for muni demand, Stern said.

Aging investors often face tax liabilities and a need for a "tax-advantaged, reliable, and transparent income stream," he said

New-issue market
In the primary market Tuesday, Jefferies priced for New Hope Higher Education Finance Corp. (Aa3/AA-/) $336.87 million of higher education revenue bonds (Texas Christian University project), Series 2026A, with 5s of 3/2028 at 2.30%, 5s of 2031 at 2.42%, 5s of 2036 at 2.89%, 5s of 2041 at 3.52%, 5s of 2046 at 4.19%, 5s of 2051 at 4.52% and 5s of 2055 at 4.60%, callable 3/15/2035.

Jefferies priced for Greenville Independent School District, Texas, (Aaa///) $142.825 million of unlimited tax school building bonds with 5s of 2/2027 at 2.32%, 5s of 2031 at 2.44%, 5s of 2036 at 2.88%, 5s of 2041 at 3.48%, 5s of 2046 at 4.12%, 5s of 2050 at 4.39% and 4.5s of 2056 at 4.616%, callable 2/15/2036.

In the competitive market, Chandler, Arizona, (Aaa/AAA/AAA/) sold $184.545 million of excise tax revenue obligations to Morgan Stanley (MS), with 5s of 7/2026 at 2.33%, 5s of 2031 at 2.29%, 5s of 2036 at 2.76%, 2040 at 3.17% and 3.875s of 2045 at 4.02%, callable 7/1/2036.

The city also sold $149.96 million GOs to BofA Securities, with 5s of 7/2027 at 2.26%, 5s of 2031 at 2.29%, 5s of 2036 at 2.78%, 5s of 2041 at 3.36% and 4s of 2044 at 3.93%, callable 7/1/2036.

AAA scales
MMD's scale was little changed: 2.26% (-2) in 2027 and 2.24% (-2) 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: 2.26% (-3) 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 was little changed: The one-year was at 2.27% (-1) in 2027 and 2.25% (-1) in 2028. The five-year was at 2.27% (unch), 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 bumped eight years and in: 2.30% (-2) in 2027 and 2.27% (-1) in 2028. The five-year at 2.24% (-1), the 10-year at 2.59% (unch) and the 30-year at 4.09% (unch) at 4 p.m.

Treasuries were little changed.

The two-year UST was yielding 3.525% (-1), the three-year was at 3.584% (-1), the five-year at 3.746% (-1), the 10-year at 4.174% (flat), the 20-year at 4.775% (flat) and the 30-year at 4.833% (+1) near the close.

CPI
The bond market wasn't surprised by the numbers from the CPI report and will "be patient and wait to see what other non-polluted data say before we change our overall forecasts," said Janus Henderson's (JHG) Kerschner.

Comparing the report to a Rorschach test, BMO Chief U.S. Economist Scott Anderson said, "Overall, investors will likely breathe a sigh of relief that the inflation readings weren't any worse and many will take solace in the fact that the yearly core rate managed to hold at 2.6% versus forecasts for a modest pick-up to 2.7%."

No tariff-related hikes showed in goods, but "services inflation remains stubbornly sticky, especially in the super-core measure," he added.

Federal Open Market Committee members won't be swayed by this read, Anderson said, "and we believe most will vote for a pause in rate cuts at the January meeting as they await more evidence of progress on the inflation front before continuing to normalize rates."

The softer-than-expected core numbers were "a modicum of good news," said Art Hogan, B. Riley Wealth chief market strategist. "This should give the Federal Reserve some breathing room to cut rates in [the first quarter] if the trend continues."

"Ultimately, the data reinforces the Goldilocks environment," said Alexandra Wilson-Elizondo, global co-CIO of multi-asset solutions at Goldman Sachs Asset Management. "That said, inflation prints are likely to shift from being a primary market trigger to more of a background constraint as the market becomes increasingly focused on the risks to Federal Reserve independence. We continue to like being long risk, avoiding the news treadmill and positioning instead for durable, tradeable themes."

The benign prices "underscore the point that tariffs have had a far more muted impact on inflation than feared," according to ING Chief International Economist James Knightley.

"Inflation is likely to remain range-bound in the 2.2% to 2.7% range," said Eric Teal, chief investment officer for Comerica Wealth Management. "The inflationary pressures from tariffs are being countered by the deflationary impact of tighter immigration in the housing market."

While investors will be pleased by "further evidence of disinflationary progress," Jeff Schulze, head of economic and market strategy at ClearBridge Investments, said, the Fed will "remain in wait and see mode given the uncertainty until more distance can be put between the data and the shutdown."

"With unemployment still low, growth running above trend, fiscal stimulus providing an offset, and inflation remaining above target, the Fed can comfortably keep rates on hold this month and likely over the next few meetings," said Seema Shah, chief global strategist at Principal Asset Management. "However, a disinflationary trend is gradually taking shape."

Although these numbers will not lead to a rate cut this month, Angelo Kourkafas, senior global strategist of investment strategy at Edward Jones, said, "If price pressures remain subdued in the coming months as data noise clears, it could open the door for another rate cut in the spring."

Hotter-than-desired inflation in the near term will keep the Fed on hold in January and perhaps March, according to LPL Financial (LPLA) Chief Economist Jeffrey Roach.

"However, by the time the committee convenes in April and June, conditions will likely warrant another cut in rates," he said. "For now, the balance of risks tilts toward the weakening labor market."

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.

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

The Maine Municipal Bond Bank (Aa2/AA//) is set to price Thursday $250 million 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 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 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 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.