Municipals could not ignore the sharp selloff in U.S. Treasuries Friday following the hotter-than-expected jobs report as both markets saw losses across the curve. Equities also closed with large losses as more market participants expect the data to temper Federal Reserve rate cuts.
The December jobs report took a Fed rate cut off the table for January, and likely longer, analysts said, and sent bond yields higher.
“Bond investors were already skittish before the jobs data,” said Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates. “The bond market has been more volatile than usual and looking for reasons to push yields higher. This report is going to fuel a continuation of higher yields and pushes off the next Fed rate cut off even further.”
But, the report, he said, “could be a buying opportunity for brave bond investors.”
Triple-A scales saw yields rise up to seven basis points, but the asset class did outperform taxables, which saw losses of 13 to 14 basis point on the short end and smaller losses out long. The 10-year UST yield topped 4.76% at the close.
“The market environment will likely become a bit more difficult in the coming week, as supply will jump to its highest level in weeks, while dealers are heavier than average,” said Mikhail Foux, head of municipal research and strategy at Barclays. “A lot will depend on the strength of the U.S. economy, and if rates will continue selling off, our market will undoubtedly be affected.”
The higher muni yields go, though, “the more investors they will likely attract, and we are not overly concerned that MMD-UST ratios and/or credit spreads will blow out,” he said.
The two-year municipal to UST ratio Friday was at 65%, the five-year at 64%, the 10-year at 66% and the 30-year at 82%, according to Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 66%, the five-year at 65%, the 10-year at 67% and the 30-year at 80% at 4 p.m.
“Hence, we will continue looking for better opportunities, and would prefer to add, but only on weakness,” Foux added.
If the 10-year Treasury revisits its October 2023 peak — 4.991% on Oct. 19, 2023 — “the 10-year muni AAA yield likely would need to rise further, but not necessarily revisit its October 2023 peak” — 3.56% on Oct. 30, 2023 (Bloomberg BVAL) — “especially if the peak selloff occurs in January/February,” said BofA Global Research’s Yingchen Li and Ian Rogow. “When muni rates and Treasury rates peaked in October 2023, muni/Treasury ratios were also much higher than today. We maintain our suggestion that muni investors should be properly hedged for as long as the 10yr Treasury stays above 4.50%.”
Supply will become more relevant to yield direction, noted Kim Olsan, senior fixed income portfolio manager at NewSquare Capital. Bond Buyer 30-day visible supply sits at $16.48 billion.
The new-issue calendar is expected to hit about $12 billion next week, led by the Triborough Bridge and Tunnel Authority’s $1.3 billion of MTA Bridges and Tunnels real estate transfer tax revenue bonds, TBTA Capital Lockbox Fund.
“California’s municipal market is likely to become more regionally focused with damaging fires circulating in the Los Angeles area,” Olsan said. “While it is too soon to know the extent of ultimate impacts, certain trades do speak to the uncertainty: a sale of Los Angeles Department of Water and Power 5s due 2042 (call 2027) on Jan. 7 at 3.35% (-11/MMD) compared to a cross trade two days later at 3.60% (+4/MMD). ”
The Los Angeles Department of Water and Power (Aa2/AA+/AA+) is set to price Wednesday $371.05 million of water system revenue bonds.
The city and county of San Francisco leads the competitive calendar with $550.495 million of taxable general obligation bonds Tuesday in three series,
“Supply-demand conditions for munis are quite favorable in January/February,” BofA Global Research said. “We estimate issuance for January and February is $32 billion and $36 billion, respectively.
“Given the large selloff, actual issuance volumes will likely come in below expectations,” Li and Rogow said. “Still, principal redemptions and coupon payments are $49 billion and $60 billion, respectively, during those months.”
From the demand side, Olsan noted that “it appears a certain pool of allocations is going into cash products as a defensive measure against an event-heavy cycle — key payroll data coming, a new presidential administration and a late-month FOMC meeting.”
Olsan said the one to three-year range represents the most-actively bought range with more than 60% of secondary volume in dealer-to-customer sales.
“Crossover buying might be expected to emerge if in fact muni yields rise due to supply accelerating and exceeding implied demand or USTs remaining under pressure and force a ratio correction,” Olsan said. “Current levels suggest that time may have already come but could accelerate on any further yield pullback.”
AAA scales
MMD’s scale saw cuts: The one-year was at 2.78% (+5) and 2.84% (+6) in two years. The five-year was at 2.95% (+6), the 10-year at 3.17% (+7) and the 30-year at 4.06% (+7) at 3 p.m.
The ICE AAA yield curve was cut: 2.83% (+6) in 2026 and 2.85% (+6) in 2027. The five-year was at 2.90% (+6), the 10-year was at 3.13% (+6) and the 30-year was at 3.97% (+6) at 4 p.m.
Bloomberg BVAL was cut: 2.78% (+3) in 2025 and 2.83% (+5) in 2026. The five-year at 2.96% (+6), the 10-year at 3.22% (+6) and the 30-year at 4.04% (+8) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut: The one-year was at 2.85% (+5) in 2025 and 2.87% (+5) in 2026. The five-year was at 2.91% (+5), the 10-year was at 3.11% (+5) and the 30-year yield was at 3.97% (+6) at 4 p.m.
Treasuries sold off.
The two-year UST was yielding 4.383% (+12), the three-year was at 4.471% (+14), the five-year at 4.577% (+13), the 10-year at 4.761% (+8), the 20-year at 5.023% (+5) and the 30-year at 4.95% (+3) at the close.
Employment report
The 256,000 jobs added “puts to rest lingering chances of a 25bp cut in January and shifts the focus to the March meeting, where further rate cuts will depend on progress on inflation,” said Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management.
But the strong report, Wells Fargo Investment Institute Senior Global Market Strategist Scott Wren said, “does not change our view that the labor market is likely to decelerate further in coming quarters and continue to look for the unemployment rate to rise to 4.8% by the end of this year. We see the Fed cutting just one time in 2025 with the fed funds target ending the year in the 4%-4.25% range.”
The numbers sent 10-year yields higher, he noted. “Long-term bond rates are attractive at current levels and we are recommending that investors lock in these rates as we see the 10-year yield ending this year in the 4.5%-5% range.”
The jobs market should cool “modestly” this year, according to Wells Fargo Securities senior economists Sarah House and Michael Pugliese. “Payroll gains are likely to ease a bit more as readings of labor demand remain near multi-year lows and a moderation in the labor force makes it somewhat harder to hire. Slower growth in the labor supply, however, should keep the unemployment rate from rising materially. We look for payroll growth to average around 120,000 this year, with the unemployment rate hovering around 4.2-4.3%.”
A January pause is “all but assured,” they said, and a March move is “unlikely.” But there will be an opportunity “to cut the fed funds rate a bit more in 2025 in an effort to return policy to a more neutral stance.”
But, Josh Jamner, Investment Strategy Analyst at ClearBridge Investments, said the report should “allay fears of downside risks to the labor market which in turn diminishes the case for further interest rate cuts.”
Although bond yields rose after the report, he said, “longer term this should be a positive development for financial markets,” as it will keep consumer spending trends solid.
The numbers show the Fed “made a policy mistake by cutting rates 100bps late last year,” said Jack McIntyre, portfolio manager at Brandywine Global. And, he added, “the longer the Fed is on pause the more likely the next move will be to start increasing policy rates.”
Still, inflation numbers will be critical to any Fed decisions, he added, “Look for the Treasury market to shift to a bear flattening from its recent bear steepening trajectory.”
Payrolls were strong in three of the past four months, and storms may have impacted the weaker October numbers, but the unemployment rate “is trending sideways, not upward,” said FHN Financial Chief Economist Chris Low. “Even if one is skeptical about the strength of this one report, it changes the longer-term context toward a neutral, rather than weakening, employment outlook.”
Inflation and the better-than-expected jobs gains “are a recipe for still more caution at the Fed before cutting rates again,” he said.
“This Fed had the wrong instincts about inflation and now have the wrong instincts about the soft landing they already achieved,” said Byron Anderson, head of fixed income at Laffer Tengler Investments.
The Fed needs to concentrate on the economy, not the neutral rate, he added. “The biggest problem the U.S. is facing is the debt and deficit and the Fed should focus on calming the debt market instead of focusing on the mythical neutral rate that can’t even be calculated.”
Going further, Peter Graf, chief investment officer at Nikko Asset Management Americas, said the report “likely sounds the death knell for this easing cycle.”
The “fickle payrolls number[‘s] … strength is legitimized by household unemployment survey results that have at least plateaued, if not peaked.”
The labor markets may be boosted by election results, according to DWS U.S. Economist Christian Scherrmann. “If the robustness continues, it certainly makes the case for the Fed to keep rates higher for a bit longer than was expected just a few months ago.”
“The Fed can be very comfortable staying put in January and will need some meaningful downside inflation surprises or reversals in upcoming jobs reports to wake them from rate slumber in March,” said Seema Shah, chief global strategist at Principal Asset Management.
Primary to come
The Triborough Bridge and Tunnel Authority (A1/A+//AA) is set to price $1.3 billion of MTA Bridges and Tunnels real estate transfer tax revenue bonds, TBTA Capital Lockbox Fund, Series 2025A, serials 2025-2028, terms 2050, 2054, 2056, 2059. Siebert Williams Shank & Co., LLC
The Airport Commission of the city and county of San Francisco (A1/AA-/A+/) is set to price Tuesday $996.335 million of San Francisco International Airport revenue bonds, consisting of $870.76 million of second series AMT revenue bonds, serials 2029-2036, term 2055, $108.41 million of second series non-AMT governmental purposes revenue bonds, serials 2037, 2053, and $17.165 million of second series taxable revenue bonds, serials 2025. Ramirez & Co., Inc.
The Orange County Health Facilities Authority (/A+/AA-/) is set to price Thursday $824.77 million of Orlando Health Obligated Group hospital revenue bonds. Morgan Stanley & Co. LLC.
The Plano Independent School District, Collin County, Texas, (Aaa/AAA//) is set to price Thursday $607.3 million of unlimited tax school building bonds, PSF guaranteed, serials 2026-2045. RBC Capital Markets.
The Jacksonville Electric Authority (Aa1/AA+/AA+/) is set to price Tuesday $533.255 million of water and sewer system revenue bonds, serials 2025, 2030-2045, terms 2050, 2055. BofA Securities.
The School Board of Miami-Dade County, Florida, (A1///) is set to price Tuesday $410.77 million of certificates of participation, serials 2026-2032. BofA Securities.
The Orlando Health Obligated Group (/A+/AA-/) is set to price Thursday $400 million of taxable corporate CUSIP hospital revenue bonds. Morgan Stanley & Co. LLC.
The Los Angeles Department of Water and Power (Aa2/AA+/AA+) is set to price Wednesday $371.05 million of water system revenue bonds, serials 2029-2045, 2048, 2051, 2055. BofA Securities.
The Cypress-Fairbanks Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $350.925 million of unlimited tax refunding bonds, PSF guaranteed, serials 2028-2040. RBC Capital Markets.
The Dallas Independent School District, Texas, (Aaa///) is set to price Tuesday $339.54 million of multi-modal unlimited tax school building bonds, PSF guaranteed. Loop Capital Markets
The Idaho State Building Authority (Aaa//AA+/) is set to price Thursday $310.59 million of school modernization facilities fund sales tax revenue education bonds. J.P. Morgan Securities LLC.
The Regents of the University of Colorado (Aa1//AA+/) is set to price Thursday $300 million of university enterprise revenue bonds. Wells Fargo Bank, N.A., Municipal Finance Group.
The Pennsylvania Higher Educational Facilities Authority (Aa1/AA+//) is set to price Tuesday $270 million of the Trustees of the University of Pennsylvania revenue bonds, serials 2035, 2045, 2055. Goldman Sachs & Co. LLC.
The Allen Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $205.94 million of unlimited tax school building bonds, PSF guaranteed, serials 2026-2050. RBC Capital Markets.
The Trustees of Purdue University (Aaa/AAA//) is set to price Wednesday $200 million of Purdue University student facilities system revenue refunding bonds. RBC Capital Markets.
The Iowa Finance Authority (/AAA/AAA/) is set to price Wednesday $186.845 million of state revolving fund tax-exempt and taxable green revenue bonds, consisting of $146.715 million of tax-exempt green bonds, serials 2033-2044, terms 2049, 2054, and $40.13 million of taxables, serials 2027-2033. BofA Securities.
The city of
Salt Lake City, Utah, (Aa1/AAA//) is set to price Tuesday $178.865 million of public utilities revenue bonds. Piper Sandler & Co.
The Texas Department of Housing and Community Affairs (Aaa/AA+//) is set to price Tuesday $175 million of residential mortgage revenue and refunding non-AMT bonds. Jefferies LLC.
Adams 12 Five Star Schools, Broomfield, Colorado, (Aa1/AA//) is set to price Tuesday $170.33 million of general obligation bonds, Colorado State Intercept Program, serials 2025-2026, 2035, 2036-2044. RBC Capital Markets.
Alaska (Aa3///) is set to price Wednesday $120.29 million of international airport systems revenue refunding and forward delivery bonds, consisting of $61.395 revenue refunding bonds, serials 2026-2035, and $58.895 million of forward delivery bonds, serials 2026-2035. Goldman Sachs & Co. LLC.
Clemson University, South Carolina, (Aa3///) is set to price Tuesday $120.145 million of athletic facilities revenue and refunding bonds, consisting of $83.61 million of revenue bonds and $36.535 million of refunding revenue bonds. Morgan Stanley & Co. LLC.
The California Public Finance Authority is on the day-to-day calendar with $118.645 million of nonrated Sunrise of Manhattan Beach senior lien senior living rental housing revenue bonds. Goldman Sachs & Co. LLC.
The Paradise Valley Unified School District No. 69 of Maricopa County, Arizona, (Aa1//AAA/) is set to price Wednesday $104.905 million of bonds, consisting of $69.1 million of school improvement bonds and $35.805 million of refunding bonds. Piper Sandler & Co.
The Sunnyvale Independent School District, Dallas County, Texas, (/AAA//) is set to price Wednesday $101.115 million of unlimited tax building and refunding bonds, PSF guaranteed. Piper Sandler & Co.
The Wyoming Community Development Authority (Aa1/AA+//) is set to price $99.98 million of non-AMT and taxable housing revenue bonds, consisting of $84.98 million of non-AMT, serials 2025-2036, terms 2040, 2045, 2050, 2054, and $15 million of taxables, serials 2025-2034. BofA Securities.
Competitive:
The city and county of San Francisco is set to sell $550.495 million of taxable general obligation bonds Tuesday in three sales, consisting of $233.02 million of taxable GOs at 11 a.m. eastern, $173.32 million of taxable GOs at 11:30 a.m. eastern and $146.155 million of taxable GOs at 12 noon eastern.
The Board of Regents of Iowa is set to sell $252 million of University of Iowa Healthcare hospital system revenue bonds at 11 am eastern Wednesday.