Municipal Summary
Municipals improved again yesterday — not on the scale of Tuesday's move, but enough to erase the negative trend since April 28th and shift momentum positively across the curve. Fundamentals have continued to create push-and-pull, mostly around Iran; but bonds have been much better bid this week (i.e., with the 10yr and 30yr UST spots now back to 4.50% and 5.00%, respectively) as oil has retreated to <$90/barrel and December Fed hike probabilities have fallen from ~90% to ~60%. And while 2yr and 5yr Treasury auctions were mediocre, they were also good enough to provide some stability/support around current lower (vs. mid-May) yields.
Amid the improvement, equities have held stable at record prices while municipal yields have begun to bounce nicely off the 3.00% tax-exempt level that has defined the bottom of the supportive 50 bps range since 2022 (Figure 1). Cheaper ratios, positive fund flows, favorable seasonals, decent sentiment, manageable dealer balances, good distribution and contained selling pressure have all helped — as have supportive comments from a variety of platforms calling for "value" and "strong entry points." So the market has once again, for now, shown some resilience amid municipal retail investors' continued pursuit of taxable equivalents >5.00%.
Active municipal fund manager relative performance has also been strong this year, with an average of 70% of active municipal managers beating their respective benchmarks YTD (i.e., which is a high total vs. the last decade average of ~40%, Figures 2 & 3). The latter is attributable to: 1) better long-end performance; 2) good term spread movement throughout the curve; 3) better high-yield and lower-investment-grade performance; 4) very few outflow weeks that would otherwise force liquidations in a down market; and 5) at least for short/intermediate managers, outperformance has gone to those underweighting the 6-12yr area of the curve that has been expensive amid such strong SMA demand in recent years. Recall, generally, active fund managers tend to overweight duration and low-credit-quality vs. their indices.
Figure 1: The municipal tax-exempt 10yr yield has again found support between 3.00-3.50%
Figure 2: A majority of both HY and IG active municipal fund managers have outperformed their benchmarks YTD.
Figure 3: Also a majority of Intermediate and Long strategy active muni fund managers have outperformed their benchmarks YTD.
Fundamentals
Conference Board consumer confidence edged down to 93.1.
Dallas Fed manufacturing: output growth decelerated, new orders dipped, input prices rose sharply.
FHFA home price index stabilized in March; Case-Shiller showed continued YoY easing; mortgage costs now 42% of buyer income.
~$160bn of IEEPA tariff refunds being disbursed rapidly; ~$20bn already paid out.
2Y auction stopped at 4.071% — highest yield since February 2025; bid-to-cover 2.64 (prior 2.65); mediocre reception.
Hike priced by December dropped to 66% from 95% Friday on Iran de-escalation hopes;
Stock-bond return correlation at multi-decade highs across developed markets (MS); historically yields above ~4-5% in US begin to weigh on equity valuations.
DB Iran scenarios for the Fed: peace deal reduces near-term hike risk; muddle-through carries highest 2026 hike risk; re-escalation opens two-sided risk.
Barclays: market may feel toppish but not priced for peace; favors equities over bonds but warns of extended CTA duration shorts that could squeeze.
Barclays Q1 earnings: decisive upside surprise led by Tech, record beat breadth; revisions continue trending up on AI capex.
BMO: pivotal next few months for gauging consumer ability to absorb energy shock; argues 2022/2023 inflation was the anomaly — no savings glut buffer this time, affordability constraints already biting.
Apollo (Slok): "Fed Fighting FOMO" — data center capex insensitive to higher rates; 2027 consensus capex still rising; combined with OBBB stimulus, rates can keep rising because hikes aren't slowing the economy.
Recent yield rise has been a real-rate story, not inflation expectations.
Paulsen: Stock market typically suffers turmoil after major oil price peaks, not during the spike; wouldn't be surprised by an S&P selloff before a year-end rally.
Kashkari suggested a prolonged war might warrant a series of rate hikes — only if second-round inflation effects emerged.
Nvidia 5Y CDS trades below US sovereign CDS.
Tripp Kaiser, CFA, is the founder of MUNISTREET, Executive Director of the Center on Municipal Capital Markets, and a professor of practice at the LBJ School of Public Affairs at the University of Texas at Austin.