Municipals were steady throughout most of the curve outside of small bumps on the short end while municipal bond mutual funds flipped back to inflows for the first week of the year. U.S. Treasury yields fell slightly and equities were mixed.
Investors added $842.4 million to municipal bond mutual funds in the first full reporting week of 2025, breaking a four-week outflow streak, per LSEG Lipper data. It follows
High-yield funds saw inflows of $527.1 million compared to the previous week’s inflows $26.3 million in the week ending Jan. 1.
Even with the muni market seeing outflows to end last year, they were not detrimental to the market, said James Welch, a municipal portfolio manager at Principal Asset Management, as there is great support from separately managed accounts and exchange-traded funds.
“The muni story this year is pretty strong,” Welch said. “It’s the best entry point in quite some time.”
Yields are at their highest levels in a year, and the taxable equivalent yields are “pushing anywhere from 7% to 8%, depending on where you are on the credit and yield curve,” he said.
Ratios are on the richer side. The two-year municipal to UST ratio Thursday was at 65%, the five-year at 65%, the 10-year at 66% and the 30-year at 81%, according to Municipal Market Data’s 1 p.m. EST read. ICE Data Services had the two-year at 65%, the five-year at 64%, the 10-year at 66% and the 30-year at 80% at 2 p.m.
Similar to 2024, he said, issuance will be a theme of 2025.
Issuance started slowly during the first full week of the year, as market participants were slow to hit the ground running following the Christmas and New Year holidays.
Volume was further hindered by the early market close Thursday due to the national day of mourning for former President Jimmy Carter.
The last sizable deal of week priced ahead of the early market close. Goldman Sachs priced for the Central Valley Energy Authority (A3///) $981.685 million of commodity supply revenue bonds, with 5s of 12/2055 with a mandatory tender date of 8/1/2035 at 4.28%, make whole call.
The true test of what issuance will look like for the rest of the month will come next week, Welch said.
Sizable deals on tap for next week include $1.3 billion of real estate transfer tax revenue bonds from the Triborough Bridge and Tunnel Authority and $996.335 million of second series revenue bonds from the San Francisco International Airport.
And with more mega deals on tap for the rest of the month — such as up to $2.5 billion of general revenue bonds from the University of California and $1.3 billion of turnpike system second senior revenue bonds from the Oklahoma Turnpike Authority in the negotiated market and $1.05 billion of GOs from the state of Washington in three series in the competitive market — Welch said billion-plus deals will be prevalent again this year.
“The market has transitioned to larger, bigger deals,” he said. “The financing needs are increasing, and the infrastructure needs are growing.”
The big unknown is what happens when President-elect Donald Trump assumes office, with November’s election-related uncertainty shifting to “a whole set of others,” he said.
The potential elimination of the tax exemption — of which market participants have varying probabilities of it happening — has caused “great anxiety” in the market and could lead to volatility and a backup in yields, Welch said.
Other sectors like higher education may also be in the “crosshairs,” he noted.
“Trump will say a lot of different things on Day 1, but the absolute implementation of those things is going to be time-lagged,” Welch said. “So there’s logistical hurdles, whether it’s legislative, whether it’s legal, that’ll take a while for whatever he wants to play itself out.”
Due to this, he expects the muni market to be “pretty healthy” for the first part of the year.
Money market fund flows
Tax-exempt municipal money market funds saw inflows of $4.085 billion for the week ending Jan.7, bringing the total assets to $139.335 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 2.04%.
Taxable money-fund assets saw $93.54 billion added.
The average seven-day simple yield was at 4.09%.
The SIFMA Swap Index fell to 1.83% Wednesday compared to the previous week’s 2.72%.
AAA scales
MMD’s scale was little changed: The one-year was at 2.73% (-2) and 2.77% (-2) in two years. The five-year was at 2.89% (unch), the 10-year at 3.10% (unch) and the 30-year at 3.99% (unch) at 1 p.m.
The ICE AAA yield curve was little changed: 2.77% (unch) in 2026 and 2.79% (unch) in 2027. The five-year was at 2.84% (unch), the 10-year was at 3.06% (unch) and the 30-year was at 3.91% (unch) at 2 p.m.
Bloomberg BVAL was unchanged four years and out: 2.75% (-2) in 2025 and 2.78% (-2) in 2026. The five-year at 2.90% (unch), the 10-year at 3.16% (unch) and the 30-year at 3.96% (unch) at 2 p.m.
Treasuries were a touch firmer.
The two-year UST was yielding 4.265% (-2), the three-year was at 4.338% (-1), the five-year at 4.455% (-1), the 10-year at 4.688% (flat), the 20-year at 4.985% (-1) and the 30-year at 4.930% (flat) at 2 p.m.
FOMC minute redux
The minutes from the December Federal Open Market Committee meeting showed the “decision to cut rates was a close one and set up for a pause of at least one meeting in January,” noted FHN Financial Chief Economist Chris Low.
Officials remain concerned about “a recent lack of progress against inflation,” while some believe “the inflationary effects of tariffs” is troubling, he said.
“Fed funds futures show 6.9% odds of a cut in January and 37% in March,” Low noted. “A full rate cut is not fully priced into futures until June.”
“Inflation concerns were not universal, however,” according to Morgan Stanley Research Managing Director and Chief U.S. Economist Michael Gapen. “Many participants see market-based components near 2.0% as a signal about where overall inflation is headed.”
Still, members’ personal assumptions about policy changes in the new administration “may have confused the messaging at the December meeting,” Gapen said.
Morgan Stanley expects quarter-point rate cuts in March and June. “We think inflation is likely to trend lower in the first half of the year, keeping gradual cuts in place, before restrictive trade policies halt disinflation — and further Fed cuts — in the second half of the year.”
Still, the minutes “provided no new bombshells in light of what we already learned last month,” said FHN Financial Macro Strategist Will Compernolle. “There were some interesting details regarding FOMC participants’ different approaches to federal policy assumptions this year, but nothing that caused markets to re-price.”
Gary Siegel contributed to this report.