Munis cheapen, USTs extend selloff

Municipals cheapened further Thursday, outperforming U.S. Treasuries. Equities ended down.

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Muni yields were cut five to 11 basis points, depending on the scale. UST yields were cut nine to 14 basis points at a 3:40 p.m. read.

Munis “capitulated” along with what happened in USTs, with the 10-year UST breaking 5%, said Chris Brigati, managing director and CIO at SWBC.

It’s been “a little bit of a giveback from the market based on … it’s kind of been overbought as we were heading toward those sub-5% yields,” he said.

The hotter-than-expected consumer price index print on Tuesday drives home that inflation remains a concern, so the market’s “got to give it back, and so just retracing on that,” Brigati said.

The muni weakness this week is a little unexpected given the size of the new-issue calendar, he noted.

Next week will see a pretty decent calendar and supply is going to be strong enough that people will say, “I did a lot of buying in the past two- to three-week period from a buyer standpoint; no need to feel like [I need to] step into it today,” and be willing to take a back seat, he said.

The cuts on the MMD AAA scale are in line with what’s being seen on the bid side of the market, but there has not been the “capitulation” on the offer side as much, Brigati said.

Fund flows
Investors pulled $176.3 million from municipal bond mutual funds in the week ended Wednesday, following $286.7 million of inflows the prior week, according to LSEG Lipper data.

High-yield funds saw outflows of $133.1 million compared to outflows of $53.6 million the previous week. High-yield funds have seen 10 straight weeks of outflows.

ICI data
Recent Investment Company Institute data shows the trend toward outflows from muni mutual funds and roughly offsetting inflows into exchange-traded funds continued for the week ending Nov. 4, said Kevin McGuigan, director at Municipal Market Analytics.

ICI reported outflows of $1.764 billion for the week ending Nov. 4, following $3.142 billion of outflows the previous week. Outflows have topped $1 billion each of the past eight weeks.

Exchange-traded funds saw inflows of $1.66 billion after $4.862 billion of inflows the week prior, per ICI data. ETF inflows have exceeded $1 billion for the past nine weeks.

“Investors’ growing preference for the liquidity, diversification and trading flexibility offered by municipal ETFs is understandable in the current environment,” McGuigan said.

Markets continue to deal with various headline risks, including “the war in Iran, persistent inflation, uncertainty surrounding Federal Reserve policy, the implications of the midterm elections, federal deficit concerns, the financing of the AI buildout and liquidity concerns in private credit markets,” he said.

“Against this backdrop, the ability to quickly adjust municipal exposure and reposition portfolios in response to changing market conditions has become increasingly valuable,” McGuigan said.