Municipal Summary
Municipals continued their recent constructive tone through the week’s second half. Customer buying activity (by par) surged and reached its highest daily total of the year on Thursday. Average trade sizes also climbed back near $300k, reflecting better institutional demand but still a dependence on retail/SMA for distribution. And while high-grade benchmarks steadied, price momentum remained in a positive condition across the curve.
However, overall conditions are still best argued as neutral, noting: 1) bids-wanted par reached ~$1.5B on Wednesday with the 20-day average figure holding ~$1.15B on Thursday (i.e., a YTD high), 2) mutual fund flows remained negative despite better ETF inflows, 3) weekly supply was the heaviest its been in six months, 4) rolling price volatility, while fading, still remained elevated throughout the week, and 5) price deviations are neutral today but are trending toward “overbought”.
So the market continues to lack enough conviction to bid prices meaningfully higher and taxable equivalent yields much further below 5.0% - at least until May’s seasonal reinvestment support arrives.
Macro/Rate Summary
March headline PPI +0.5% m/m vs. +1.1% consensus; YoY decelerating to 2.8% from 4.2% — energy surged 8.5%, food fell 0.3%
Despite the soft headline, PPI has run above 6% m/m annualized for three straight months — energy is creating a sustained inflation overhang
Fed’s Hammack: baseline is hold “a good while,” cuts only if labor market deteriorates significantly
Fed futures not pricing a full cut over the next 12 months; some argue the rate cut narrative is effectively dead near term
April fund manager survey the most bearish since June 2025 — global growth expectations plunged to -36%, inflation expectations soared to 69%
Fund manager cash levels rose to 4.3%, highest since May 2025 but still below prior peaks of 4.8% and 6.3%
It was reported that the traditional Treasury safety premium is compressing — AAA corporate spreads near 35bps as relentless US debt issuance erodes the UST advantage
Foreign UST holdings rose $14B in February; seven largest financial centers added $44B in a single month and $295B trailing 12 months
It was reported that Japanese life insurers have largely closed their duration gap, removing a structural long-end bid — FX-hedged US IG no longer offers clear yield pickup vs. JPY alternatives
S&P 500 up 10.7% since March 30, Nasdaq back at highs — one view holds rallies this violent at record valuations are historically anomalous
Beige Book: economy growing at a “slight to moderate” pace, businesses operating in “suspense” — no near-term call to move rates
Iran de-escalation narrative strengthened mid-week; Brent crude at $95/bbl, down from conflict highs
Small business optimism remains fragile; used car prices rising again, reflecting cumulative vehicle ownership cost inflation of 36% since 2020
Secondary Breaks
Over the last 10 business days (4/7-4/17), secondary breaks averaged approximately -2 bps through originals across nearly 700 trades, with 68% of bonds trading tighter than their original issue yield after adjusting for AAA movement between sale and trade date.
By offering type, negotiated deals broke approximately -3 bps firmer versus -1 bp for competitive sales— consistent with historical negotiated vs. competitive dynamics.
A clear duration gradient emerged across the curve: short maturity breaks averaged +1.06 bps, intermediates -1.83 bps and long bonds -2.59 bps through originals, reflecting greater primary market concession to clear duration amid softer institutional bids.
Sector performance also diverged meaningfully. Higher education (+3.20 bps) and housing (+1.53 bps) broke to higher yields, while transportation (-4.89 bps) saw the tightest breaks. Much of the latter is also dependent on rating and offering type.
By rating, many of the highest-quality bonds broke to higher yields in the secondary: AAA and AA+ averaged +2.47 bps and +4.35 bps, respectively. Meanwhile, A-rated and below broker to lower yields by approximately -2 to -5 bps; the latter tightening more aggressively and reflecting the greater underwriting risk and associated distribution challenges with higher yield paper.
Breaks by deal size varied greatly over the period; although there was a bias for larger deals to show larger break disparities - as is typical amid the difficulty moving large amounts of product through the primary market.
