Over the past week, the fixed income markets continue to react to the uncertainty created by on-again/off-again tariff announcements and the de-escalation of tensions between the President and the Fed. Treasury bonds have outperformed municipals, particularly on the long end of the yield curve, were yields on Treasury bonds have dropped 20 bps versus a 5 bps decline on municipals. The strong moves in Treasury bonds are driven by a resurgence in risk appetite while municipals are responding to improved muni/Treasury ratios. However, last week the term premium, which is the additional yield required on longer maturities, hit 80 bps which is the highest level we have seen in over a decade. Although we are seeing more confidence in the long-end of the yield curve, investors remain cautious amid the uncertainty.
This afternoon, the yield differential between 30-year Treasury bonds and 30-year ‘AAA’ municipals compressed to just 24 basis points from 39 basis points last Monday. Inside of 2-years, municipals and Treasury bonds remain essentially unchanged. Past 2-years, Treasury yields progressively flattened as investors extended out the yield curve to take advantage of steeper slopes. Slopes along the muni curve continue to be steepest around the 9-11-year tenor of the curve, with a slope of 24 bps over 3-years, and the 14-18-year tenor of the curve, with a slope of 48 bps over 5-years. The 14-18 year tenor of the municipal curve continues to offer a combination of relatively steep slope and meaningful yield, allowing investors to lock-in over 90% of the yield on the 30-year muni maturity and over 86% of equivalent Treasury yields.
Ratios and Strategy
Muni/Treasury yields continue to converge at the long-end resulting in increasingly compelling muni/Treasury ratios. Over the past week, ratios dropped at the short-end, but steadily progressed further out the curve. However, over the past month, ratios have become dramatically more appealing on the short-end from 65.84% last month to 75% this past week. Over the past 10-years, the mean 30-year muni/Treasury ratio is 94.43%. At the long-end, municipal bonds are now yielding 94.29% of Treasury bonds, which is very appealing compared to historic averages.
Fund Flows and Calendar
Last week was the seventh consecutive week of outflows from municipal bond mutual funds. Amid the busy trading week, LSEG Lipper Global Fund Flows reported $1.1 billion migrated out of long-term muni funds and $142 million left high-yield funds while intermediate munis saw inflows of $7 million. Given the conservative nature of intermediate funds, this move is not surprising. This week the new issue calendar, excluding deals considered day-to-day, includes $14.6 billion in new supply with the District of Columbia planning to sell $1.49 billion, the East Bay Municipal Utility District selling $1.09 billion and Los Angeles Department of Water & Power selling $993.5 million.
Herbert J. Sims & Co. Inc. is a SEC registered broker-dealer, a member of FINRA, SIPC. The information contained herein has been prepared based upon publicly available sources believed to be reliable; however, HJ Sims does not warrant its completeness or accuracy and no independent verification has been made as to its accuracy or completeness. The information contained has been prepared and is distributed solely for informational purposes and is not a solicitation or an offer to buy or sell any security or instrument or to participate in any trading or investment strategy, and is subject to change without notice. All investments include risks. Nothing in this message or report constitutes or should be construed to be accounting, tax, investment or legal advice.
April 28, 2025 | Timothy Iltz
Overview
Over the past week, the fixed income markets continue to react to the uncertainty created by on-again/off-again tariff announcements and the de-escalation of tensions between the President and the Fed. Treasury bonds have outperformed municipals, particularly on the long end of the yield curve, were yields on Treasury bonds have dropped 20 bps versus a 5 bps decline on municipals. The strong moves in Treasury bonds are driven by a resurgence in risk appetite while municipals are responding to improved muni/Treasury ratios. However, last week the term premium, which is the additional yield required on longer maturities, hit 80 bps which is the highest level we have seen in over a decade. Although we are seeing more confidence in the long-end of the yield curve, investors remain cautious amid the uncertainty.
This afternoon, the yield differential between 30-year Treasury bonds and 30-year ‘AAA’ municipals compressed to just 24 basis points from 39 basis points last Monday. Inside of 2-years, municipals and Treasury bonds remain essentially unchanged. Past 2-years, Treasury yields progressively flattened as investors extended out the yield curve to take advantage of steeper slopes. Slopes along the muni curve continue to be steepest around the 9-11-year tenor of the curve, with a slope of 24 bps over 3-years, and the 14-18-year tenor of the curve, with a slope of 48 bps over 5-years. The 14-18 year tenor of the municipal curve continues to offer a combination of relatively steep slope and meaningful yield, allowing investors to lock-in over 90% of the yield on the 30-year muni maturity and over 86% of equivalent Treasury yields.
Ratios and Strategy
Muni/Treasury yields continue to converge at the long-end resulting in increasingly compelling muni/Treasury ratios. Over the past week, ratios dropped at the short-end, but steadily progressed further out the curve. However, over the past month, ratios have become dramatically more appealing on the short-end from 65.84% last month to 75% this past week. Over the past 10-years, the mean 30-year muni/Treasury ratio is 94.43%. At the long-end, municipal bonds are now yielding 94.29% of Treasury bonds, which is very appealing compared to historic averages.
Fund Flows and Calendar
Last week was the seventh consecutive week of outflows from municipal bond mutual funds. Amid the busy trading week, LSEG Lipper Global Fund Flows reported $1.1 billion migrated out of long-term muni funds and $142 million left high-yield funds while intermediate munis saw inflows of $7 million. Given the conservative nature of intermediate funds, this move is not surprising. This week the new issue calendar, excluding deals considered day-to-day, includes $14.6 billion in new supply with the District of Columbia planning to sell $1.49 billion, the East Bay Municipal Utility District selling $1.09 billion and Los Angeles Department of Water & Power selling $993.5 million.
Herbert J. Sims & Co. Inc. is a SEC registered broker-dealer, a member of FINRA, SIPC. The information contained herein has been prepared based upon publicly available sources believed to be reliable; however, HJ Sims does not warrant its completeness or accuracy and no independent verification has been made as to its accuracy or completeness. The information contained has been prepared and is distributed solely for informational purposes and is not a solicitation or an offer to buy or sell any security or instrument or to participate in any trading or investment strategy, and is subject to change without notice. All investments include risks. Nothing in this message or report constitutes or should be construed to be accounting, tax, investment or legal advice.