Municipals and U.S. Treasuries improved Thursday and equities ended mixed after the Fed cut rates 25 basis points and left the door open for further cuts in December.
Triple-A yields fell three to seven basis points Thursday while govies were better by up to 11 basis points, retracing some of Wednesday’s losses.
Thursday’s better performance was driven by the Fed moves as well as a settling of markets overall as investors digested the election results.
Some were surprised by the severity of the market’s reaction to the election outcome on Wednesday, as munis found themselves “caught up in the UST downdraft, if for no other reason than relative values needed to realign,” said Kim Olsan, a senior fixed income portfolio manager at NewSquare Capital.
The two-year municipal to UST ratio Thursday was at 65%, the three-year at 64%, the five-year at 66%, the 10-year at 70% and the 30-year at 86%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 65%, the three-year at 63%, the five-year at 64%, the 10-year at 69% and the 30-year at 84% at 4 p.m.
A “constructive development was the degree of secondary net buying amidst material price changes” on Wednesday, Olsan said.
Yields are still high and the market is seeing a bit of a “resurgence” of interest at these levels, said Matt Fabian, a partner at Municipal Market Analytics, Inc.
Trump’s plan to raise tariffs would lead to inflation and widen federal deficits, thus prompting more Treasury supply, Fabian said, pushing both muni and UST yields higher.
Since the Fed started cutting rates, inflation expectations and real yields have risen, said Bill Zox, portfolio manager at Brandywine Global. “I don’t think the Fed will cut in December or January, but the Treasury market will have to deliver that message to the Fed rather than the other way around.”
Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions within Goldman Sachs Asset Management, said she expects another quarter-point reduction at the December meeting. “However, stronger data and uncertainty over fiscal and trade policies mean rising risks that the Fed may opt to slow the pace of easing,” she said. “The word ‘skip’ could enter our vocabulary in 2025.”
Another input for municipal yield direction is how muni fund flows “bear out during any prolonged downturn,” Olsan said.
Despite the post-election selloff,
High-yield funds saw inflows of $333.7 million compared with outflows of $64.6 million the week prior.
Money market funds reported $3.2 billion of inflows in the latest reporting week, with total assets under management at $136.79 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds fell to 2.85%.
The SIFMA Swap Index fell to 2.68% Wednesday compared to the previous week’s 3.24%.
Customer buying Wednesday was most active in the one to three-year range where 66% of all trades took place, Olsan said.
“Yields in this range are 2.75%-3.00% and give buyers two advantages: defensive posturing during an easing cycle and fair taxable equivalent yields,” she said. ”Short-durations may have some staying power as money market rates fell dramatically as well.”
What is “left to reconcile is what additional correction may occur as municipal supply develops,” Olsan said.
“If there were any doubts about advance refunding volume coming before year-end, those concerns have receded with the 10-year UST just 36 basis points off its annual high yield (4.70%) — which negates much of the economics of taxable munis being issued to retire older debt,” she said.
AAA scales
Refinitiv MMD’s scale was bumped three to seven basis points: The one-year was at 2.93% (-3) and 2.77% (-3) in two years. The five-year was at 2.78% (-3), the 10-year at 3.08% (-5) and the 30-year at 3.93% (-7) at 3 p.m.
The ICE AAA yield curve was bumped three to seven basis points: 2.99%% (-3) in 2025 and 2.77% (-3) in 2026. The five-year was at 2.77% (-3), the 10-year was at 3.07% (-7) and the 30-year was at 3.86% (-5) at 4 p.m.
The S&P Global Market Intelligence municipal curve was bumped three to six basis points: The one-year was at 2.96% (-3) in 2025 and 2.78% (-4) in 2026. The five-year was at 2.75% (-3), the 10-year was at 3.05% (-6) and the 30-year yield was at 3.84% (-6) at 4 p.m.
Bloomberg BVAL was bumped four to seven basis points: 2.93% (-4) in 2025 and 2.74% (-4) in 2026. The five-year at 2.78% (-4), the 10-year at 3.08% (-4) and the 30-year at 3.85% (-7) at 4 p.m.
Treasuries were firmer.
The two-year UST was yielding 4.209% (-6), the three-year was at 4.160% (-7), the five-year at 4.175% (-10), the 10-year at 4.329% (-10), the 20-year at 4.633% (-8) and the 30-year at 4.539% (-8) at the close.
FOMC
As expected, members of the Federal Open Market Committee unanimously voted to lower the federal funds rate target by 25 basis points to a range between 4.5% and 4.75%.
The statement noted inflation “remains somewhat elevated,” while “the risks to achieving its employment and inflation goals are roughly in balance.” While the outlook is unclear, the statement said the Fed remains “attentive to the risks to both sides of its dual mandate.”
In his press conference, Fed Chair Jerome Powell said policy is still restrictive and the Fed is “trying to find the right pace and the right destination” for rates.
Election results won’t impact monetary policy, Powell said. When asked if he would resign if asked to by President-Elect Donald Trump, Powell simply replied, “No.” He wouldn’t comment about whether he’s worried about Trump attempting to decrease the Fed’s independence.
Fiscal policy is on an unsustainable path, he said.
“The market response is fairly subdued so far,” noted Christian Hoffmann, head of fixed income at Thornburg Investment Management. “Interestingly, a senior Trump advisor leaked that President-elect Donald Trump is likely to allow Federal Reserve Chair Jerome Powell to serve out the remainder of his term. The timing of this leak is extremely unlikely to be coincidental.”
The “statement provides no new information regarding the likelihood of future cuts,” noted Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni. “The big impact on rates this week was clearly the election. As results rolled in, longer-term rates jumped higher. Investors expect somewhat stronger economic growth, higher inflation, and larger deficits.”
Fitch Ratings Chief Economist Brian Coulton noted the removal of the reference to “gaining confidence” inflation is moving to 2% “as recent CPI outturns have, once again, revealed stickiness in services inflation.”
The change could have been made to “clean up” the statement, said Chris Low, chief economist at FHN Financial, “but also may have changed because the year-on-year core inflation rate is no longer falling.”
“The Fed is cutting rates from a level it considers highly restrictive,” he added. “Inflation that is lower than at the start of the year, even if it has not fallen since the last meeting, is still low enough to remove some restriction.”
Dan Siluk, head of global short duration & liquidity and portfolio manager at Janus Henderson Investors, said it might “reflect a more cautious or tempered optimism regarding the trajectory of inflation towards the Fed’s 2% target,” and suggest the panel “wants to avoid signaling an overly confident stance on inflation, especially in the context of an uncertain fiscal path.”
Alternately, he said, it could suggest the Fed will “respond flexibly to incoming data.”
Powell said the removal resulted from the Fed starting to cut rates. The Fed is aiming for 2% inflation, and will not intentionally undershoot that goal.
The decision “provided little drama for market watchers,” said Wells Fargo Investment Institute global fixed income strategist Luis Alvarado. “Our view is that the Fed will maintain its independence to develop monetary policy and that Chair Powell will complete his term.”
The Fed will become cautious next year as it assesses if President Trump’s economic proposals “and how those policies end up affecting inflation, labor markets and overall economic growth,” he said.
Questioning the decision, Byron Anderson, head of fixed income at Laffer Tengler Investments, asked, “if inflation is still elevated and the committee risks are roughly in balance, what is the point of continuing to cut?”
“The Fed gained control of the recession narrative with its supersized cut at the last meeting,” he continued. “If you believe the economy is on good footing the risks to inflation are increasing with every rate cut. Without a credit crisis emerging, which is not evident at the moment, the greater risk to markets is adding stimulus to an already inflationary leaning environment.”