Selling pressure ticks up, supply grows, mutual fund flows stay positive


Municipals saw spots of weakness on the short end of the curve while two high-grade issuers priced the largest deals left of the week, mutual funds saw smaller inflows and U.S. Treasuries closed the session softer 10-years and in, but a touch stronger out long. Equities rallied as the markets contemplated the better likelihood of a soft landing by the Fed.

LSEG Lipper reported fund inflows of $63.8 million for the week ending Wednesday following $300.5 million of inflows the prior week. The four-week moving average is at $321.1 million of inflows, down from the prior week’s $341.7 million of inflows.

High-yield muni bond funds saw another round of inflows at $180.4 million compared to last week’s inflows of $278.6 million and marking the 11th consecutive week of positive flows in that space. Despite the positive performance, there are underlying concerns over the high-yield market as participants digest the loss of Citi’s large book.

In the primary Thursday, Jefferies priced and repriced to lower yields $722.505 million of New York City Municipal Water Finance Authority Projects — Second Resolution State Clean Water and Drinking Water Revolving Funds revenue bonds, Series 2024 A, for the New York State Environmental Facilities Corp. (Aaa/AAA/AAA/). Bonds maturing in 6/2025 with a 5% coupon yield 3.01% (-2), 5s of 2029 at 2.56%, 5s of 2034 at 2.60% (-5), 5s of 2039 at 3.80% (-8), 5.25s of 2044 at 3.55%, 5s of 2049 at 3.83% (-4) and 5.25s of 2053 at 3.87% (-4), callable 6/15/2034.

Morgan Stanley & Co. LLC priced $125 million of sewer revenue bonds for Fairfax County, Virginia, (Aaa/AAA/AAA/) with 5s of 7/2025 at 3.01%, 5s of 2029 at 2.55%, 5s of 2034 at 2.61%, 5s of 2039 at 3.05%, 5s of 2044 at 3.50%, 5s of 2049 at 3.76% and 5s of 2054 at 3.86%, callable 7/15/2034.

“There wasn’t much to change from a fundamental perspective with munis post-FOMC, but the ongoing ratio realignment” has led to a modest bear flattening, noted Kim Olsan, senior vice president at FHN Financial.

Muni to UST ratios Thursday were flat. The two-year muni-to-Treasury ratio Thursday was at 61%, the three-year at 60%, the five-year at 58%, the 10-year at 58% and the 30-year at 82%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 61%, the three-year at 59%, the five-year at 58%, the 10-year at 59% and the 30-year at 81% at 3:30 p.m.

Outside of monetary policy activity, “there is a quiet theme emerging of larger bids wanteds and offering totals,” Olsan said.

On the day of the FOMC meeting and rate announcement, munis posted their highest bids wanteds total of the month, at $1.29 billion, she said.

“It marked the sixth consecutive session of a $1 billion-plus figure — not so unusual for month- and quarter-end approaching but also relevant for the tolerance of bidders to hold stable levels,” Olsan said.  

Another component Olsan is watching is a slowly increasing tally in secondary offering totals.  

“Bloomberg’s PICK offer platform has moved into the $7 billion range, matching last November’s volume when yields were at their most volatile,” she said. ”Both metrics bear watching as the final two weeks of the month will bring several large-scale issues from California, New York, Washington and Texas (a $750 million Austin School pricing will mark the second-largest PSF issue this year).”

The Bond Buyer supply sits at $12.05 billion.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.07% and 2.84% in two years. The five-year was at 2.47%, the 10-year at 2.47% and the 30-year at 3.65% at 3 p.m.

The ICE AAA yield curve was cut on the short end: 3.12% (+2) in 2025 and 2.89% (+3) in 2026. The five-year was at 2.53% (+2), the 10-year was at 2.50% (unch) and the 30-year was at 3.59% (unch) at 4 p.m.

The S&P Global Market Intelligence municipal curve was cut on the short end: The one-year was at 3.08% (+2) in 2025 and 2.86% (+2) in 2026. The five-year was at 2.50% (unch), the 10-year was at 2.49% (unch) and the 30-year yield was at 3.62% (unch), according to a 3 p.m. read.

Bloomberg BVAL was little changed: 3.06% (+1) in 2025 and 2.87% (unch) in 2026. The five-year at 2.45% (unch), the 10-year at 2.46% (unch) and the 30-year at 3.63% (unch) at 4 p.m.

Treasuries were mixed.

The two-year UST was yielding 4.645% (+4), the three-year was at 4.422% (+3), the five-year at 4.258% (+2), the 10-year at 4.271% (flat), the 20-year at 4.531% (-2) and the 30-year at 4.436% (-2) at the close.

FOMC redux
Following Wednesday’s Federal Open Market Committee statement and projections, most analysts see the panel beginning rate cuts in June or July.

With the dot plot remaining at three cuts this year, BNP Paribas Chief U.S. Economist Carl Riccadonna said the bank is “more confident in our expectation for the first cut to come in June.”

The statement sent a clear message, he said, “while Fed policymakers need more evidence and greater confidence before they are ready to start rate cuts, they remain confident in the broad direction of travel.”

“Our reading is that as long as core PCE inflation moderates in the next few months, enough to shift the six-month growth rate back close to 2%, the Fed will move toward a first rate cut in June,” said Ryan Swift, U.S. bond strategist at BCA Research.

BCA sees three or four cuts this year.

Morgan Stanley expects rate cuts in June, September, November and December.

Christian Hoffmann, portfolio manager at Thornburg Investment Management, said, “Fixed income will continue to grapple between expectations for lower rates, which is good for bonds, against more tolerance for inflation, which is bad for bonds.”

The SEP “suggests the FOMC believes that inflation is on a path back to its 2% target, but it is likely to be achieved slightly later than previously expected,” said Wells Fargo Securities senior economists Sarah House and Michael Pugliese.

They also expect a rate reduction in June. “However, the risks to our outlook are skewed toward the FOMC beginning to ease a little later in the summer or potentially proceeding at a slower pace that leads to less than the 100 bps of easing we project through the end of this year,” they said.

Paul Mielczarski, head of global macro strategy at Brandywine Global, said the higher inflation reads the past two months are seen by the Fed as “short-term bumps in the road, and the disinflation process remains on track.”

But, “they need to see inflation momentum moderating” before they cut rates, he said.

“The Fed’s economic forecasts embrace the idea that recent economic strength is in part a reflection of strong labor force and productivity growth,” Mielczarski said. “This allows for faster economic growth without additional inflationary pressure.”

“The stage has been set for an interesting year with fluctuating interest rates and election dynamics colliding for an economic showdown equivalent to the March Madness tournament frenzy,” said Paul Feinstein, CEO and founder of Audent Global Asset Management. “We’ve witnessed the market going the opposite way than the Fed has portrayed.

Gary Siegel contributed to this report.