Municipal Summary
Municipal final reads were 1-2 bps better yesterday, holding their early-session adjustments rather than bumping yields lower with Treasuries through the afternoon. Even a strong 20yr auction — which stopped a full basis point through the WI yield, with indirect demand at a near-two-year high — did little to move tax-exempts. Instead, the session closed with small gains, leaning more into 1) low volumes, 2) limited price discovery, and 3) a steady ETF market for context. The last two sessions have been positive, and the macro/fundamental picture has turned a little less ambiguous (i.e., amid Iran progress and declining oil prices). But municipals still seem a little too stuck — not uncomfortably so, but enough to be dismissing an otherwise strong technical backdrop. Ratios have come off their lows, there is still plenty of cash being (or ready to be) deployed via reinvestment and money-market dollars, municipal credit quality is strong, dealer balances are manageable, and the market is about to enter one of the strongest two-month seasonal stretches of the calendar year.
So while tone, participant sentiment, technicals, and Treasuries were all better, MUB's mid-day gains faded into the close and high-grade benchmarks improved only modestly. Maybe it is simply behavioral — a defining characteristic of the retail-driven municipal market — where a looming FOMC meeting, a Friday close, the World Cup, and summertime schedules collectively inhibit what would otherwise be more aggressive demand activity and favorable price discovery. So the market is better, and plenty comfortable — but also a little stuck.
Municipal Returns
IG Maturities — Duration extension on display throughout time periods (20yr +10.14% over 1yr, 15yr +8.85%). The lone soft patch was last week's mild intermediate/SMA-area give-back (10yr -0.05%, 15yr -0.04%), while the front end held positive.
HY Maturities — Same long-end leadership in HY (15yr +8.89%, 20yr +7.94% over 1yr), but HY firmed more than IG last week, with gains running through the curve (5yr +0.13%). The -4.35% 1yr figure in the 3yr bucket is the same idiosyncratic drag seen below, not a broad signal.
IG Credit — IG kept grinding higher, with every sector green across the 1mo through 1yr windows; Hospital remained the clear leader (+2.18% YTD, +7.81% over 1yr). The past week was simply a pause rather than a turn — Broad IG slipped -0.02%, with Education (-0.04%) and W&S (-0.07%) the softest spots.
HY Credit — Puerto Rico has continued to lead (+4.81% YTD, +10.48% over 1yr) while Tobacco lagged (-0.91% MTD, -2.43% over 1yr). The -4.49% 1yr print in Transportation remains idiosyncratic (i.e., brightline). Last week was mixed, with Housing (-0.18%) the weakest.
Credit Market Returns
Credit Returns — EM has led decisively over the last year (EM HY +13.58%, EM Gov +11.94% over 1yr). And while every credit market was green last week, muni IG and HY lagged.
Macro/Rate Summary
Industrial production rose only 0.1% in May (below consensus) — suggests war-driven inventory build has peaked; manufacturing output stalled; capacity utilization inched up to highest in a year.
Empire State Manufacturing fell sharply, missing consensus, on declines in shipments and new orders; prices received expectations jumped.
Homebuilder sentiment weakened in June on elevated mortgage rates and affordability constraints.
FOMC decision Wednesday — Warsh's first meeting as chair; consensus hold with easing bias removed.
BoJ hiked 25bps to 1.0% — highest since 1995; maintained plan to taper JGB purchases to ~¥2tn by Q1 2027; signaled continued tightening bias.
$13bn 20Y reopening auction — 20Y supply well-received lately (9 of last 11 stopped through, all 3 since war began). Tuesday’s auction was strong.
Barclays Energy: maintains $100/bbl 2026 Brent forecast despite deal — US commercial inventories 7mb below early-2022 trough, drawing 11mb/week; near-term risks skewed to upside; SPR releases structured as loans, not outright supply.
ING: damage already done — 10Y real yield structurally ~40bp higher since pre-war and unlikely to collapse; 10Y breakevens back to pre-war 2.3%; 10Y to remain sticky around 4.45%; another month of elevated inflation prints to come.
DB Treasury ownership: foreign ownership of USTs fell to 30% in Q1 (near multi-decade low of 29%); Fed still owns ~30% of 10yr+ maturities; private holdings concentrated in 5yr or less.
China May data mixed: industrial production +4.5% (above forecast) on exports; retail sales unexpectedly contracted (weakest since December 2022); fixed asset investment slumped; new home prices -3.5% YoY (35th consecutive monthly decline).
Bloomberg/markets: Fed still seen likely to hike by year-end despite Iran deal; futures traders made no significant moves ahead of Warsh's debut.
Developed-market inflation has surged back well above 2010-2019 norms; policy rates settling well above post-GFC norms.
Global credit impulse turned positive, driven almost entirely by US strength; EM flat on China weakness (UBS).
Tripp Kaiser, CFA, is the founder of MuniStreet Research, 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. The information contained in this publication is for informational purposes only and reflects the opinions of MuniStreet. It does not constitute investment or other advice, nor a recommendation or solicitation to buy or sell any security..