In the midst of a supply and demand quandary — with the Federal Open Market Committee announcement looming on Wednesday — the municipal market began the week with a lackluster feel.

That tone combined with the weakness in Treasuries on Monday — as investors were likely unwinding their longer-term trades and sitting on the sidelines until the Fed makes its announcement — should keep the market quiet the next couple of days, according to Howard Mackey, managing director at NW Financial.

At the same time, however, the overall municipal market remains stable and steady, given the return of record inflows the last couple of weeks, as well as the continued heavy demand for a limited amount of bonds.

“The inflows were a reversal of several months ago when there were a lot of outflows,” Mackey said. “Now there is a strong underlying municipal market — coupled with no supply — so I think the market is going to remain strong” heading into February, he added.

Separately managed accounts are predominant buyers in the retail market, as they have lots of cash coming in, and are tending to buy between one and 15 years.

The rest of the Treasury market was weak last week and down a little more Monday, he said.

Pension funds, he said, are shifting strategies from being heavily invested in the equity market to longer-term fixed-income investments due to the increase in interest rates that allow them to match up their longer-term liabilities. Popular are investment-grade corporates, Treasuries, and municipals.

The FOMC meeting, Mackey said, will “have the most major impact on the market over the next few weeks. People are going to stay on the sidelines until the Fed takes some action.”

Secondary trading picked up last week with around $41.1 billion in volume, with 52% of trades being clients buying, said Jason Wong, vice president of municipals at AmeriVet Securities.

With the ongoing low supply, he said, “clients continue to purchase bonds in the secondary market causing yields to fall, which has resulted in munis becoming even more expensive when compared to Treasuries.” Last week, clients put up around $5.4 billion up for the bid with four days having bids-wanted of over $1 billion, per Bloomberg.

“Muni yields remained relatively unchanged for the week with the exception of yields on 10-year notes rising by just 0.8 basis points to 2.22% to end the week,” he said.

“Munis are off to a great start this year with yields falling an average of 40 basis points,” Wong said.

While muni yields rose slightly last week, muni-UST ratios continue to fall with 10-year ratio at 63% Monday versus 70% at the start of the year, per ICE.

“These are the lowest levels to U.S. Treasuries since July 2021 as many investors are returning to the market and as supply continues to come at a snail’s pace,” he said.

On Monday, the three-year muni-UST ratio was at 53%, the five-year at 56%, the 10-year at 62% and the 30-year at 88%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 54%, the five at 57%, the 10 at 63% and the 30 at 88% at 4 p.m.

Municipal bond mutual funds saw inflows for the third straight week, adding roughly $1.3 billion, according to Refinitiv Lipper. Investors have added about $4.8 billion in the first three weeks of the year.

“This is positive news as it’s a sign that investors are coming back into the market,” Wong said.

Muni bonds continue to start the year off on a good note as they are up by about 2.83% and “with the rally in Treasuries, coupled with inflows into muni funds, as well as the lack of supply has fueled this rally to its best start since 2009,” according to Wong.

“Even with the Fed expecting to raise rates again later this week and most likely at their next meeting as well, many investors are optimistic that the worst is behind us and they see the light at the end of the tunnel,” he said.

This, though, “has caused some adverse effects on the markets as munis have been outpacing Treasuries by about 25 basis points, which has caused munis to become increasingly rich especially in the short end of the curve,” he said. The two-year stands at 52% with the five-year average being 87% while the 10-year is at 63% with the five-year average at 87.60%, per ICE.

Secondary trading
Los Angeles Department of Water and Power 5s of 2024 at 2.20%-2.15%. Florida Board of Education 5s of 2025 at 2.31%. Washington 5s of 2026 at 2.20%.

Maryland 5s of 2027 at 2.08%. Ohio 5s of 2029 at 2.15%-2.14%. Wake County, North Carolina, 5s of 2030 at 2.09% versus 2.10% Friday.

Maryland 5s of 2036 at 2.70% versus 2.67% Wednesday. New York City TFA 5s of 2036 at 2.84%.

Triborough Bridge and Tunnel Authority 5s of 2047 at 3.72%. Massachusetts 5s of 2052 at 3.60% versus 3.53% Wednesday and 3.55%-3.49% on 1/18.

AAA scales
Refinitiv MMD’s scale was unchanged. The one-year was at 2.33% and 2.17% in two years. The five-year was at 2.05%, the 10-year at 2.19% and the 30-year at 3.20% at 3 p.m.

The ICE AAA yield curve was changed up to a basis point: at 2.29% (flat) in 2024 and 2.22% (-1) in 2025. The five-year was at 2.07% (-1), the 10-year was at 2.17% (-1) and the 30-year yield was at 3.20% (+1) at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.33% in 2024 and 2.16% in 2025. The five-year was at 2.06%, the 10-year was at 2.20% and the 30-year yield was at 3.18% at a 4 p.m. read.

Bloomberg BVAL was cut up to a basis point: 2.32% (unch) in 2024 and 2.15% (unch) in 2025. The five-year at 2.10% (unch), the 10-year at 2.22% (unch) and the 30-year at 3.23% (unch).

Treasuries were weaker.

The two-year UST was yielding 4.255% (+5), the three-year was at 3.966% (+6), the five-year at 3.675% (+5), the seven-year at 3.622% (+4), the 10-year at 3.551% (+3), the 20-year at 3.793% (+2) and the 30-year Treasury was yielding 3.665% (+3) at 4 p.m.

Primary to come:
The Fort Worth Independent School District, Texas, (Aaa///) is set to price Thursday $277.370 million of PSF-insured unlimited tax school building bonds, Series 2023. Piper Sandler.

The Colorado Housing and Finance Authority (Aaa/AAA//) is set to price Thursday $125 million of taxable single-family mortgage bonds, including $84 million of Class I bonds, 2023 Series A-1, serials 2023-2033, terms 2038 and 2049; $21 million of Class II adjustable rate bonds, 2023 Series A-2, term 2043; and $20 million of GNMA MBS Pass-Through Program, Class I bonds, 2023 Series B, term 2053. RBC Capital Markets.

The Alaska Municipal Bond Bank (A1/A+//) is set to price Tuesday $86.935 million of GOs, consisting of $57 million of tax-exempt bonds, 2023 Series One, serials 2023-2042, terms 2047 and 2052, and $29.935 million of AMT bonds, 2023 Series Two, serials 2023-2042, terms 2047 and 2052. Jefferies.

Competitive:
South Windsor, Connecticut, (/AAA//) is set to sell $28.5 million of GOs, Issue of 2023, at 11:30 a.m. eastern Tuesday.

The East Montgomery County Municipal Utility District No. 12, Texas, is set to sell $20.635 million of unlimited tax bonds, Series 2023, at 11:30 a.m. eastern Tuesday.

Newark, New Jersey, is set to sell $35.598 million of qualified general capital improvement bonds, Series 2023, at 11:30 a.m. eastern Thursday.

The Clark County School District Finance Corp., Kentucky, (A1///) is set to sell $22.645 million of school building revenue bonds, Series of 2023, at 12 p.m. eastern Thursday.