PrintShort munis richen slightly, USTs see losses
BY SourceMedia | MUNICIPAL | 01/15/26 04:05 PM ESTShort-term munis saw slight firmness, while shorter-maturity USTs saw losses and equities ended up.
The two-year muni-UST ratio Thursday was at 62%, the five-year at 60%, 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 62%, the five-year at 59%, the 10-year at 64% and the 30-year at 87% at a 4 p.m. read.
Munis finished strong in 2025 despite volatility and some observers are optimistic that this strength will continue into 2026.
"We're starting off from a really high tax equivalent yield and that really starts the market from a position of strength," said Matt Norton, CIO for municipal bonds at AllianceBernstein
AllianceBernstein
A lot will be driven by the macroeconomic outlook, with strategists anticipating interest rates will likely go down, Norton said.
Once people start seeing money-market yields on an after-tax basis, close to 2% or lower, some of the $8 trillion in cash will flow into the muni market, he said.
"A lot of investors are going to come out of cash and try to lock in high tax equivalent yields, and given how steep the municipal curve is right now, ultimately, we believe some of that money is going to go into longer bonds to try to lock in the most attractive taxable equivalent yields," Norton said.
Many firms believe 2026 will be another year of record issuance, with some forecasting issuance of at least $600 billion.
In most months, there will be more than enough demand to meet the supply, Norton said.
"It's just going to be in those time periods where you're seeing a lot of supply, but also potentially some Treasury volatility, particularly negative returns in Treasuries. If those come at the same time, that's where you could potentially see the months where there's the most volatility," he said.
Flows into muni mutual funds have been positive to start the year.
Fund flows topped $50 billion last year, with a larger share of that going to exchange-traded funds, said Daryl Clements, a municipal portfolio manager at AllianceBernstein
However, those inflows were not enough to offset the sizable outflows seen in 2022 and 2023, Norton said.
Those years were not good years. That has reversed, although not all the money that left in 2022 has come back, he said.
Currently, the muni curve is very steep. At some point, it will flatten, but timing is difficult to predict, Norton said.
"The nice thing about how steep it is right now is that one you're getting paid a lot to wait for it to flatten, so you're getting a lot of additional yield and a lot of additional compensation to go out longer right now," he noted.
Muni credit is doing well, Clements said.
"States are coming off their highs, but they are sitting on significant amounts of cash. Reserve balances are strong, even at the local level. So, by and large, outside of your idiosyncratic issues that always pop up, municipal credit is in good shape," he said.
New issuance
In the primary market Thursday, Morgan Stanley
Details for the second tranche, $350 million of Series 2026A-2, were not available as of 3:30 p.m.
J.P. Morgan Securities priced for the Tarrant County Cultural Education Facilities Finance Corp. (Aa2/AA-//) $314.52 million of hospital revenue bonds (Baylor Scott & White Health project), Series 2026E, with 5s of 11/2027 at 2.43%, 5s of 2031 at 2.62%, 5s of 2036 at 3.08%, 5s of 2041 at 3.63% and 5s of 2045 at 4.18%, callable 5/15/2036.
BofA Securities priced for the Maine Municipal Bond Bank (Aa2/AA//) $250 million of transportation infrastructure revenue bonds (TransCap Program). The first tranche, $190 million of Series 2026A highway and bridge bonds, saw 5s of 9/2026 at 2.28%, 5s of 2030 at 2.33%, 5s of 2031 at 2.37%, 5s of 2036 at 2.87% and 5s of 2040 at 3.27%, callable 9/1/2036.
The second tranche, $60 million of taxable Series 2026A general transportation project bonds, saw all bonds priced at par: 3.758s of 9/2026, 4.055s of 2031, 4.604s of 2036 and 4.804s of 2040, callable 9/1/2036.
BofA Securities priced for Queen Creek, Arizona, (/AA/AA/) $230.52 million of certificates of participation, with 5s of 10/2033 at 2.54%, 5s of 2036 at 2.93%, 5s of 2041 at 3.51%, 5s of 2046 at 4.20%, 5s of 2051 at 4.50%, 5.25s of 2056 at 4.60% and 5.5s of 2065 at 4.80%, callable 10/1/2035.
In the competitive market, the Kansas Development Finance Authority (Aaa//AAA/) sold $277.805 million of revolving funds revenue bonds, Series 2026SRF, to Truist Securities, with 5s of 5/2027 at 2.20%, 5s of 2031 at 2.28%, 5s of 2036 at 2.72%, 5s of 2041 at 3.35% and 5s of 2046 at 4.01%, callable 5/1/2036.
Fund flows
Investors added $1.825 billion to municipal bond mutual funds in the week ended Wednesday, following $1.485 billion of inflows the prior week, according to LSEG Lipper data.
High-yield funds saw inflows of $346.5 million compared to inflows of $290.7 million the previous week.
Tax-exempt municipal money market funds saw outflows of $2.55 billion for the week ending Jan. 12, bringing total assets to $151.298 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds was 1.23%.
Taxable money-fund assets saw $28.084 billion pulled, bringing the total to $7.579 trillion.
The average seven-day simple yield was 3.38%.
The SIFMA Swap Index was at 1.28% on Wednesday compared to the previous week's 1.37%.
AAA scales
MMD's scale was little changed: 2.22% (-2) in 2027 and 2.22% (-2) in 2028. The five-year was 2.27% (unch), the 10-year was 2.65% (-2) and the 30-year was 4.21% (unch) at 3 p.m.
The ICE AAA yield curve was bumped up to a basis point: 2.23% (-1) in 2027 and 2.20% (-1) in 2028. The five-year was at 2.22% (-1), the 10-year was at 2.65% (unch) and the 30-year was at 4.17% (unch) at 4 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.24% (-2) in 2027 and 2.22% (-2) 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 little changed: 2.27% (-2) in 2027 and 2.23% (-2) in 2028. The five-year at 2.23% (unch), the 10-year at 2.58% (unch) and the 30-year at 4.08% (unch) at 4 p.m.
Treasuries saw losses, the largest on the front of the curve.
The two-year UST was yielding 3.565% (+5), the three-year was at 3.618% (+6), the five-year at 3.767% (+5), the 10-year at 4.166% (+3), the 20-year at 4.74% (+1) and the 30-year at 4.791% (+1) near the close.
