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

Tocqueville Asset Management expands business with $1.3B AUM acquisition
Tocqueville Asset Management expands business with $1.3B AUM acquisition

The 40-year-old independent investment partnership picks up high caliber team.

New York RIA, former rep combined $225K by SEC for breaching fiduciary duties
New York RIA, former rep combined $225K by SEC for breaching fiduciary duties

Elderly clients impacted in transfers to higher-fee advisory accounts.

Do we need a new word for retirement as fewer people give up work?
Do we need a new word for retirement as fewer people give up work?

Another study highlights the oversized share of older Americans still working.

Investors' risk-on appetite reaches 15-year high
Investors' risk-on appetite reaches 15-year high

BofA survey reveals bullish sentiment.

World's first catastrophe bond launched by ex-Pimco exec
World's first catastrophe bond launched by ex-Pimco exec

Rick Pagnini wants to demystify cat bond investments.

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.