Munis slightly weaker in spots, UST yields climb

Munis were steady to slightly weaker Friday, as U.S. Treasuries cheapened and equities ended lower after a stronger-than-expected jobs report raised the odds of a rate hike before the end of the year.

Muni yields were cut up to two basis points, depending on the curve. UST yields cheapened by three to 12 basis points, with short-term USTs seeing the largest losses.

The muni market's strong performance in May and so far in June has been in line with historical trends, Mikhail Foux and other strategists wrote for Barclays (BCS) ? but historical trends suggest the market will lose steam soon as supply builds.

"Near term, technicals remain supportive ? investors are well?-?funded following June redemptions, dealer inventories are light and overall market tone is quite firm," they wrote. "More broadly, valuations are increasingly stretched at current spreads and ratios, limiting possible upside. This is especially evident for healthcare credits."

Employment report
Nonfarm payrolls grew by 172,000 in May, outpacing the expected 88,000 gain, leading analysts to increase the odds of a Federal Reserve rate increase this year.

"Another strong jobs report added to evidence that the labor market is on firmer ground in 2026 compared with last year ? enough to stoke expectations of a Fed rate hike before year end," said Jennifer Timmerman, senior investment strategy analyst at Wells Fargo Investment Institute.

"Bond yields responded to the latest sign of economic strength and Fed policy implications by moving higher, keeping a lid on the S&P 500 futures price despite support for strong earnings growth signaled by this morning's jobs data."

With the labor market having gone through a weak spot, FHN Financial Chief Economist Chris Low said, "it is tempting to characterize the 172,000 payroll rise in May and even better 188,000 three-month average since February as a boom. The fact [that] aggregate hours worked rose just 0.1% is a sobering reminder. These are tepid increases that appear big only because they follow on the heels of two years of abysmal job growth."

The Fed will watch the inflation numbers, he said, noting, "There is no reason to worry about the maximum-employment directive with the unemployment rate creeping downwards toward 4.25%."

The numbers pushed up the odds of a late-year rate hike by "just a smidgeon," Low said. "But cuts next year are falling out of the picture. As a result, two-year yields rose 10 basis points in the first half-hour after the report, while 10s [were] up 6.5 bps."

Still, James McCann, senior economist of investment strategy at Edward Jones, said, "In the near term, the data confirms that Fed easing is off the table this year and markets continue to worry that the next move could be a hike."

But for the Fed to enter a hiking cycle, he said, "we would need to see signs of a larger and more persistent spike in inflation."

New Fed Chair Kevin Warsh will have his work cut out for him "at his first meeting given the complicated balancing act facing Fed policy at present and well-documented divisions on the FOMC rate setting committee," McCann said.

New-issue market
Issuance is an estimated $11.541 billion for the week of June 8, with $8.501 billion of negotiated deals on tap and $3.04 billion of competitives, according to LSEG.

Massachusetts leads the negotiated calendar with $983.79 million of general obligation bonds across two tranches.

The competitive calendar is led by Orange County, Florida, with $583.68 million of tourist development tax revenue bonds sold in two series.