Municipal bonds sold off Wednesday, following U.S. Treasuries to much higher yields in a risk-on trade after a sweeping victory by former President Donald Trump and a Republican takeover of the Senate. Equities saw massive gains on the day.
The red wave that took the presidency and the Senate —
Muni triple-A yields curves rose by 11 to 17 basis points, depending on the scale, while UST yields rose nine to 17 basis points, both with the largest losses out long.
Muni-UST ratios rose as a result. The two-year municipal to UST ratio Wednesday was at 66%, the three-year at 64%, the five-year at 66%, the 10-year at 71% and the 30-year at 87%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 66%, the three-year at 66%, the five-year at 67%, the 10-year at 73% and the 30-year at 88% at 4 p.m.
Market participants are assessing the election results, even though many expected a Trump victory, said Peter Block, managing director of credit strategy at Ramirez. “You can anticipate it, you can expect it, but when it happens, it’s still a little shocking,” he said, adding it still would have been a shock if the results were reversed.
Now, bond markets and yields “have surged in anticipation of the fiscal policy shift” ahead, said BMO Capital Markets Economic Research strategists.
“More growth means higher real yields and more inflation means even higher nominal yields, on top of the upward pressure applied by a burgeoning supply of [UST] bonds to finance the hefty deficits,” they said.
Munis will continue to follow USTs higher “with the magnitude of the sell-off tied to municipal [exchange-traded fund] flows, as we expect another day of near-negligible issuance,” said J.P. Morgan strategists, led by Peter DeGroot.
The selloff may also
“On balance, among a now higher profile for overnight rates, higher real yields and inflation expectations/risks, and increased credit risk, it’s hard to think of 10-year yields now feeling comfortable below 4%,” BMO Capital Markets Economic Research strategists said.
The market has spoken and the focus has turned to the impact of growth, inflation and deficits, said James Pruskowski, James Pruskowski, chief investment officer at 16Rock Asset Management.
“We have good two-way flow, and choppy markets breed opportunity,” he said.
Block noted some believe Trump’s policies will create “huge deficits” for the federal government, leading to higher rates.
“If deficit constraints fail to influence policy among fiscal conservatives, rates may reach a tipping point that would constrain growth, like when 10s touched 5% last year,” Pruskowski said. “With infrastructure at the forefront for economic expansion, a shift of supply into the taxable muni market is likely at some point,” widening spreads, generating broader demand, and enhancing the technical backdrop for tax-exempt munis.
The Fed is expected to cut rates 25 basis points at its Thursday meeting “with continued references to data dependency regarding the pace of rate cuts ahead,” said Andrzej Skiba, head of BlueBay U.S. Fixed Income at RBC Global Asset Management
Following the expected cut, the Fed “may follow up with one more cut, taking effective Fed funds to 4.375%,” said Mark Dowding, BlueBay chief investment officer at RBC Global Asset Management.
There may be a pause at this point, especially if “easing financial conditions give the economy another bump up in the next few months,” he said.
Skiba expects Fed Chair Jerome Powell to “wait until the administration is in place early next year before reflecting on potential implications for monetary policy.”
The FOMC, though, may not want to ease policy by that much “if new tax cuts and tariffs cause inflation to shoot higher over the next couple of years,” said Wells Fargo economists. Their forecast has the FOMC cutting its target range for the federal funds rate from 4.75%-5.00% to 3.00%-3.25% by the end of 2025.
“Thus, we think the risks to our fed funds rate forecast are skewed to the upside (i.e., less easing next year than we currently project),” they said.
The FOMC’s reaction would likely be “more hawkish in response to higher inflation from tax cuts than from tariffs,” Wells Fargo economists said.
“Tighter monetary policy is an effective method for slowing demand growth, but it cannot do much to combat inflationary pressure from a supply shock such as tariffs,” they said.
Morgan Stanley strategists, though, expect Trump to focus on tariffs in the earlier part of the new administration.
“In Trump’s first term, tax cuts came before policies that created growth risk, like tariff escalation,” but they believe this will be flipped in his second term.
“Tariffs can be executed through executive power, but fiscal expansion likely requires deliberation over much of 2025 due to the need to deal with the set of expiring TCJA tax cut provisions,” Morgan Stanley strategists said.
With the risk of tariffs to other areas outside of China, like Europe and Mexico, they said “it’s not unreasonable for markets to price in a variety of tariffs scenarios and related growth pressures.”
AAA scales
Refinitiv MMD’s scale was cut 16 to 17 basis points: The one-year was at 2.96% (+16) and 2.80% (+16) in two years. The five-year was at 2.81% (+16), the 10-year at 3.13% (+16) and the 30-year at 4.00% (+17) at 3 p.m.
The ICE AAA yield curve was cut 11 to 17 basis points: 3.02% (+11) in 2025 and 2.80% (+13) in 2026. The five-year was at 2.80% (+16), the 10-year was at 3.13% (+17) and the 30-year was at 3.91% (+17) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut 12 to 15 basis points: The one-year was at 2.99% (+12) in 2025 and 2.82% (+12) in 2026. The five-year was at 2.78% (+12), the 10-year was at 3.11% (+15) and the 30-year yield was at 3.90% (+15) at 4 p.m.
Bloomberg BVAL was cut 14 to 16 basis points: 2.96% (+14) in 2025 and 2.78% (+14) in 2026. The five-year at 2.82% (+15), the 10-year at 3.13% (+15) and the 30-year at 3.91% (+15) at 4 p.m.
Treasuries sold off.
The two-year UST was yielding 4.267% (+9), the three-year was at 4.235% (+10), the five-year at 4.275% (+13), the 10-year at 4.432% (+16), the 20-year at 4.713% (+15) and the 30-year at 4.608% (+17) at the close.
Primary on Tuesday
Morgan Stanley priced for the California Community Choice Financing Authority (Aa3///) on Tuesday $1.004 billion of green term-rate Clean Energy Project revenue bonds, Series 2024F, with 5s of 11/2027 at 3.43%, 5s of 5/2029 at t3.59%, 5s of 11/2029 at 3.61% and 5s of 11/2032 at 3.95%, callable 8/1/2032.