Short-term muni bonds swoon after jobs change rate cut calculus

Short-term muni bonds swoon after jobs change rate cut calculus
Strategists see the front end of debt curve moving in sync with expectations on Federal Reserve movements.
OCT 07, 2024
By  Bloomberg

The shortest-dated municipal bonds sold off after a blowout jobs report caused investors to recalibrate the odds of another big interest-rate cut from the Federal Reserve.

On Friday, yields on three-month AAA municipals shot up 29 basis points — the biggest one-day jump since 2022 — after labor data showed a still strong US economy. That puts yields on the ultra-short securities higher than AAA municipal bonds maturing in 16 years — deepening once again, an already pronounced inversion of the muni curve.

Short-term state and local debt yields have been elevated compared to longer term debt for over two years. The muni curve inverted after the Federal Reserve started on its rate hiking regime in 2022. That relationship was just starting to return to normal — until the too hot jobs data shook traders’ conviction in the scope of the Fed’s future policy easing.

Muni bonds extended the selloff Monday, with the 10-year AAA benchmark yield edging up three basis points.   

Mikhail Foux, head of municipal research and strategy at Barclays Plc, said state and local debt is reacting in tandem with US Treasuries.

“Whatever happens in our market — typically it’s derivative what’s happened in the Treasury market,” he said. Expectations for less aggressive Fed rate cuts directly affect what happens on the front end of the muni curve, he added.

Chad Farrington, co-head of municipal bond strategy at DWS Group, said the market is reflecting the repricing of Fed cuts. “The front end, inside of five years, is really going to follow the Fed and what the market is thinking there,” he said. 

Longer-dated municipals have been outperforming compared to Treasuries, but that could be because state and local debt tends to lag those moves.

JPMorgan Chase & Co. strategists expect muni bonds to eventually follow the broader selloff in Treasuries. The muni market is also contending with a surge in supply ahead of the presidential election in November, which could also weigh on prices. 

“We expect that tax-exempt rates will reset higher in sympathy with the UST market, particularly given expected heavy supply weeks approaching the election,” the strategists said.

Latest News

How could SEC priorities shift for investment managers post-election?
How could SEC priorities shift for investment managers post-election?

Regulation experts warn day-to-day operations could be impacted.

Healthcare focused RIA extends reach with new practice group
Healthcare focused RIA extends reach with new practice group

Florida based financial advisory firm is addressing unique industry challenges.

Stocks retain election gains, dollar eases
Stocks retain election gains, dollar eases

Traders take a pause and focus on Fed rate cut bets.

Treasury sell-off eases as investors weigh Trump impact
Treasury sell-off eases as investors weigh Trump impact

Global markets want to understand likely outcome from policies.

Crypto frenzy boosts BlackRock iShares to new high
Crypto frenzy boosts BlackRock iShares to new high

Bitcoin ETF took more than $4 billion post-election.

SPONSORED Out with the old and in with the new: a 50% private markets portfolio

A great man died recently, but this did not make headlines. In fact, it barely even made the news. Maybe it’s because many have already mourned the departure of his greatest legacy: the 60/40 portfolio.

SPONSORED Destiny Wealth Partners: RIA Team of the Year shares keys to success

Discover the award-winning strategies behind Destiny Wealth Partners' client-centric approach.