Munis sell off, follow UST yields higher

Munis sold off through midday Friday, following U.S. Treasuries higher as the war in the Middle East, higher oil prices and rising inflation concerns roil bond markets. Equities are down.

MMD's scale was cut eight to 10 basis points. MMD's 10-year is at 2.98%-3.00% and the 30-year is at 4.43%-4.45% at a 12:05 p.m. reading.

The ICE AAA yield curve was cut 10 to 13 basis points, and Bloomberg BVAL was cut five to seven basis points at 1 p.m.

"The markets are still trying to parse for clues as to when the war in the Middle East may start to de-escalate ? but headlines that may have eased concerns a few days ago, are being replaced with fresh ones that may point to an extended conflict and that is the reaction we may be seeing [Friday]," said Mohammed Murad, head of municipal credit research at PTAM.

Oil prices remain elevated, with some analysts speculating they could rise to $180 per barrel if things don't change in a month, with no resolution to the war in sight, said Matt Fabian, president of Municipal Market Analytics.

"Looking at where oil was and the potential for disruption, and this being tax season and issuers having to pull deals, there's no reason why yields wouldn't have been higher," he said

The surprise, though, was that yields did not see large cuts throughout the week. Now that yields have moved higher from Thursday into Friday, it brings expectations in line with reality, Fabian said.

While it's unclear how long the war in the Middle East will drag on, once President Donald Trump announces an end to the war, things could change "on a dime," as happened with the tariff-induced volatility in April 2025, said Peter Block, managing director of credit strategy at Ramirez.

"As soon [the war] is over and the Strait of Hormuz is open, you're just going to have a huge rally, and then things will be back to normal," he said, noting that for the time being financial markets are weaker.

Furthermore, some of the market weakness this week is a reaction to what happened with the Federal Reserve, which held rates steady at its meeting, along with the possibility the European Central Bank will hike, said a sellside source.

The Fed futures market is predicting a 50/50 chance of one rate cut from the Federal Reserve this year and may even have to raise rates later in the year if the oil crisis drags on, Block said.

Overall, this month's muni market weakness "has been mostly driven by the parts of the market that have done well to start the year," said Barclays (BCS) strategists.

"The belly did very well early on, while long-dated bonds lagged; now in a stark reversal, the 5-10y maturity bucket has come under pressure, and even a never-ending SMA bid was not able to protect it from weakening," they said. "As a result, the 10s30s and 10s20s parts of the curve have flattened back to their November levels or even lower, dropping below the four-year average for the 10s20s slope, while also recouping their losses to start the year and more."

However, the sellside source noted the market volatility may be overdone.

"It's just an example of where people just overreact in the moment. And we have access to too much information, and it causes ? kneejerk reactions," they said.

Furthermore, the volatility in the muni market looks like "a lot when you're right in the middle of it, but when you look back over a two-year period, we've covered similar terrain multiple times before, so you just got to kind of hang in there," the sellside source said.

Barclays (BCS) strategists, though, disagreed: "We never thought the current municipal selloff would be as bad as last year's, but we still feel that the asset class is not yet out of the woods and remain cautious, looking for better opportunities, especially when the pipeline is expected to pick up starting next week, which should put additional pressure on munis."