Municipals sold off Wednesday, moving higher in sympathy with U.S. Treasuries after hotter-than-expected inflation data showed the Fed may not be able to cut rates this year. Equities ended mixed.
Muni yields were cut six to 12 basis points Wednesday, depending on the curve, while UST yields rose eight to 11 basis points.
Inflation is front and center this week, with the consumer price index report released on Wednesday and the producer price index on Thursday.
“Given the lack of progress towards the Fed’s 2% target, I think the market will be closely watching both reports,” said Cooper Howard, a fixed-income strategist at Charles Schwab.
Jochen Stanzl, chief market analyst at CMC Markets, said, “What makes today’s rise in CPI inflation data so precarious is that many believe this is just the beginning, as tariffs could push inflation even higher. Market volatility is set for a perfect storm as the mix of higher inflation and the threat of tariffs serve to scare investors.”
The two expected Fed rate cuts this year are in jeopardy, he noted, as the market now expects just one “and today’s CPI number may help to price that out even further.”
Elsewhere, tax-exempt ratios “largely suggest neutral relative value versus corporates and taxable municipals,” said J.P. Morgan strategists led by Peter DeGroot.
Yields on long-dated high-grade munis are near one-year highs, with long UST rates are closer to three-year highs, they said.
“As such, absolute yields on the long-end appear attractive based on their historical trading range, especially when considering our long-term projections for lower rates in 2025,” J.P. Morgan strategists said.
In January, muni-UST ratios “richened by 3-2-2 percentage points in 2-5-10 years but cheapened by 3-1 percentage points in the 20-30-year spots, respectively,” they said.
The two-year municipal to UST ratio Wednesday was at 62%, the five-year at 63%, the 10-year at 66% and the 30-year at 85%, according to Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 63%, the five-year at 64%, the 10-year at 67% and the 30-year at 84% at 4 p.m.
“With early February reinvestment capital spent, this week’s supply may require range bound-to-lower UST rates to be digested smoothly,” J.P. Morgan strategists said.
In the coming months, there will be “intermittent periods to get invested at cheaper levels in the more challenging technical period in March-May, as reinvestment capital dwindles and supply accelerates,” they said.
The Investment Company Institute reported inflows of $852 million for the week ending Feb. 5, following $1.344 billion of inflows the previous week.
Exchange-traded funds saw inflows of $109 million after $53 million of inflows the week prior, per ICI data.
In the primary market Wednesday, Siebert Williams Shank preliminarily priced for
The second tranche, $417.79 million of tax-exempt Series G-1 bonds, saw 5s of 11/2027 at 2.84%, 5s of 2030 at 3.09%, 5s of 2035 at 3.42% and 5s of 2038 at 3.61%, callable 5/1/2035.
Pricing details were unavailable for the taxable Series F-2 bonds and taxable Series G-2 bonds.
Wells Fargo priced for the
The second tranche, $149.865 million of Series 2025B refunding bonds, saw 5s of 7/2026 at 2.75%, 5s of 2030 at 2.91%, 5s of 2035 at 3.21% and 5s of 2040 at 3.54%, noncall.
BofA Securities priced for the Kentucky Municipal Energy Agency (A3/NR/A/NR/) $121.78 million of Energy Center I Project power system revenue bonds, with 5s of 1/2029 at 3..16%, 5s of 2030 at 3.21%, 5s of 2035 at 3.51%, 5s of 2040 at 3.93%, 5s of 2045 at 4.33% (Assured Guaranty-insured), 5s of 2050 at 4.50% (Assured Guaranty-insured) and 5s of 2055 at 4.57% (Assured Guaranty-insured), callable 1/1/2035.
AAA scales
MMD’s scale was cut 10 to 12 basis points: The one-year was at 2.70% (+10) and 2.72% (+10) in two years. The five-year was at 2.81% (+10), the 10-year at 3.07% (+12) and the 30-year at 4.09% (+12) at 3 p.m.
The ICE AAA yield curve was cut six to 10 basis points: 2.70% (+6) in 2026 and 2.71% (+10) in 2027. The five-year was at 2.81% (+10), the 10-year was at 3.05% (+10) and the 30-year was at 3.99% (+10) at 4 p.m.
The S&P Global Market Intelligence municipal curve was cut 10 to 11 basis points: The one-year was at 2.73% (+10) in 2025 and 2.74% (+10) in 2026. The five-year was at 2.82% (+11), the 10-year was at 3.06% (+11) and the 30-year yield was at 4.00% (+11) at 4 p.m.
Bloomberg BVAL was cut eight to 10 basis points: 2.64% (+8) in 2025 and 2.71% (+8) in 2026. The five-year at 2.82% (+9), the 10-year at 3.06% (+9) and the 30-year at 4.01% (+10) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.362% (+8), the three-year was at 4.395% (+8), the five-year at 4.479% (+11), the 10-year at 4.634% (+10), the 20-year at 4.897% (+9) and the 30-year at 4.835% (+9) at 4 p.m.
CPI
A hotter-than-expected consumer price index will keep interest rates at bay, economists said.
“Today’s inflation report will make for very uncomfortable reading for the Fed,” said Seema Shah, chief global strategist at Principal Asset Management. “The biggest monthly headline inflation increase since August 2023 will not be received well by policymakers or markets alike.”
While some one-off issues may have factored into the read, she said, “the combination of average earnings growth surprising to the upside last week, the supercore services inflation number moving sharply higher today and the government’s policy agenda threatening to raise inflation expectations, is almost too convincing to dismiss.”
If this trend continues, Shah said, the Fed may not be able to cut rates at all this year.
The numbers confirm “investors’ anxiety regarding too-hot inflation,” said Sameer Samana, Wells Fargo Investment Institute senior global market strategist.
In addition, these numbers don’t include inflation that could be sparked by recent tariff-related announcements, he said, “which will make their impact felt later in the year.”
Inflation remains an issue, Samana said, and “while risk markets can go higher, it will be a choppier trajectory than the last two years.”
Investors should lengthen duration on portfolios as the 10-year Treasury yield rises, “and lock in what we believe to be attractive yields.”
“This report puts the final nail in the coffin for the rate cut cycle, which we believe is over,” said Josh Jamner, investment strategy analyst at ClearBridge Investments.
The large gains in “travel-related categories, such as airfares, lodging away from home (hotels), and auto rentals” suggest “a healthy consumer, as these categories are largely discretionary in nature,” he said.
Noting price increases trended higher in January, Jamner said, “disinflation has largely stalled over the past two to three quarters.”
If this trend continues, he said, “the Fed could end up needing to raise interest rates in the second half of 2025.”
“The bottom line is clear,” said Dan Siluk, head of global short duration and liquidity and portfolio manager at Janus Henderson. “The Fed should not be cutting.”
Headline, core and supercore “all came in higher than expectations,” he said, and “the three-month and six-month annualized reads are also moving higher.”
Although January CPI reads can be skewed by “seasonality and distortions, the labor market is clearly stable and economic conditions don’t warrant easier conditions,” Siluk said.
“This is not a good number,” said Brian Coulton, chief economist at Fitch Ratings. “Core inflation on a month-on-month basis increased to 0.4%, the fastest pace since last March. The pick-up was broad-based, with both core goods and services inflation rising, the latter boosted by transport services.”
In what looks like a repeat of 2024, he said, “it illustrates how the Fed has not completed the job of getting inflation back down just as new inflation risks — from tariff hikes and a squeeze on labor supply growth — start to emerge.”
Scott Anderson, chief U.S. economist and managing director at BMO Economics, said, “The risk of Fed rate hikes, while still low, is going up.”
The report will “raise questions about whether the Fed may have already cut rates too far, too fast,” said Mark Streiber, an economic analyst at FHN Financial.
Primary to come
The Humble Independent School District (Aaa/AAA//) is set to price $270.35 million of PSF-insured unlimited tax school building and refunding bonds. Wells Fargo.
The Tolleson Union High School District No. 214 (AAA/AA//) is set to price Thursday $114.93 million of Projects of 2023 and 2024 school improvement bonds, serials 2026-2028, 2031-2041. Stifel.
Competitive
Danbury, Connecticut, is set to sell $155.25 million of GO bond anticipation notes at 11 a.m. Thursday.
The Cherokee County School District, Georgia, (Aa1/AA//) is set to sell $100 million of GOs at 10:30 a.m. Thursday.