Municipals saw spots of weakness on the short end of the curve while two high-grade issuers priced the biggest deals left of the week, mutual funds saw smaller inflows and U.S. Treasuries closed the session softer 10-years and in, but a touch stronger out long. Equities rallied because the markets contemplated the higher likelihood of a soft landing by the Fed.

LSEG Lipper reported fund inflows of $63.8 million for the week ending Wednesday following $300.5 million of inflows the prior week. The four-week moving average is at $321.1 million of inflows, down from the prior week’s $341.7 million of inflows.

High-yield muni bond funds saw one other round of inflows at $180.4 million in comparison with last week’s inflows of $278.6 million and marking the eleventh consecutive week of positive flows in that space. Despite the positive performance, there are underlying concerns over the high-yield market as participants digest the lack of Citi’s large book.

In the first Thursday, Jefferies priced and repriced to lower yields $722.505 million of Latest York City Municipal Water Finance Authority Projects — Second Resolution State Clean Water and Drinking Water Revolving Funds revenue bonds, Series 2024 A, for the Latest York State Environmental Facilities Corp. (Aaa/AAA/AAA/). Bonds maturing in 6/2025 with a 5% coupon yield 3.01% (-2), 5s of 2029 at 2.56%, 5s of 2034 at 2.60% (-5), 5s of 2039 at 3.80% (-8), 5.25s of 2044 at 3.55%, 5s of 2049 at 3.83% (-4) and 5.25s of 2053 at 3.87% (-4), callable 6/15/2034.

Morgan Stanley & Co. LLC priced $125 million of sewer revenue bonds for Fairfax County, Virginia, (Aaa/AAA/AAA/) with 5s of seven/2025 at 3.01%, 5s of 2029 at 2.55%, 5s of 2034 at 2.61%, 5s of 2039 at 3.05%, 5s of 2044 at 3.50%, 5s of 2049 at 3.76% and 5s of 2054 at 3.86%, callable 7/15/2034.

“There wasn’t much to alter from a fundamental perspective with munis post-FOMC, but the continued ratio realignment” has led to a modest bear flattening, noted Kim Olsan, senior vp at FHN Financial.

Muni to UST ratios Thursday were flat. The 2-year muni-to-Treasury ratio Thursday was at 61%, the three-year at 60%, the five-year at 58%, the 10-year at 58% and the 30-year at 82%, in response to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 61%, the three-year at 59%, the five-year at 58%, the 10-year at 59% and the 30-year at 81% at 3:30 p.m.

Outside of monetary policy activity, “there may be a quiet theme emerging of larger bids wanteds and offering totals,” Olsan said.

On the day of the FOMC meeting and rate announcement, munis posted their highest bids wanteds total of the month, at $1.29 billion, she said.

“It marked the sixth consecutive session of a $1 billion-plus figure — not so unusual for month- and quarter-end approaching but additionally relevant for the tolerance of bidders to carry stable levels,” Olsan said.  

One other component Olsan is watching is a slowly increasing tally in secondary offering totals.  

“Bloomberg’s PICK offer platform has moved into the $7 billion range, matching last November’s volume when yields were at their most volatile,” she said. “Each metrics bear watching as the ultimate two weeks of the month will bring several large-scale issues from California, Latest York, Washington and Texas (a $750 million Austin School pricing will mark the second-largest PSF issue this yr).”

The Bond Buyer supply sits at $12.05 billion.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.07% and a pair of.84% in two years. The five-year was at 2.47%, the 10-year at 2.47% and the 30-year at 3.65% at 3 p.m.

The ICE AAA yield curve was cut on the short end: 3.12% (+2) in 2025 and a pair of.89% (+3) in 2026. The five-year was at 2.53% (+2), the 10-year was at 2.50% (unch) and the 30-year was at 3.59% (unch) at 4 p.m.

The S&P Global Market Intelligence municipal curve was cut on the short end: The one-year was at 3.08% (+2) in 2025 and a pair of.86% (+2) in 2026. The five-year was at 2.50% (unch), the 10-year was at 2.49% (unch) and the 30-year yield was at 3.62% (unch), in response to a 3 p.m. read.

Bloomberg BVAL was little modified: 3.06% (+1) in 2025 and a pair of.87% (unch) in 2026. The five-year at 2.45% (unch), the 10-year at 2.46% (unch) and the 30-year at 3.63% (unch) at 4 p.m.

Treasuries were mixed.

The 2-year UST was yielding 4.645% (+4), the three-year was at 4.422% (+3), the five-year at 4.258% (+2), the 10-year at 4.271% (flat), the 20-year at 4.531% (-2) and the 30-year at 4.436% (-2) on the close.

FOMC redux
Following Wednesday’s Federal Open Market Committee statement and projections, most analysts see the panel starting rate cuts in June or July.

With the dot plot remaining at three cuts this yr, BNP Paribas Chief U.S. Economist Carl Riccadonna said the bank is “more confident in our expectation for the primary cut to are available in June.”

The statement sent a transparent message, he said, “while Fed policymakers need more evidence and greater confidence before they’re ready to begin rate cuts, they continue to be confident within the broad direction of travel.”

“Our reading is that so long as core PCE inflation moderates in the subsequent few months, enough to shift the six-month growth rate back near 2%, the Fed will move toward a primary rate cut in June,” said Ryan Swift, U.S. bond strategist at BCA Research.

BCA sees three or 4 cuts this yr.

Morgan Stanley expects rate cuts in June, September, November and December.

Christian Hoffmann, portfolio manager at Thornburg Investment Management, said, “Fixed income will proceed to grapple between expectations for lower rates, which is nice for bonds, against more tolerance for inflation, which is bad for bonds.”

The SEP “suggests the FOMC believes that inflation is on a path back to its 2% goal, but it surely is more likely to be achieved barely later than previously expected,” said Wells Fargo Securities senior economists Sarah House and Michael Pugliese.

Additionally they expect a rate reduction in June. “Nonetheless, the risks to our outlook are skewed toward the FOMC starting to ease a bit of later in the summertime or potentially proceeding at a slower pace that results in lower than the 100 bps of easing we project through the tip of this yr,” they said.

Paul Mielczarski, head of world macro strategy at Brandywine Global, said the upper inflation reads the past two months are seen by the Fed as “short-term bumps within the road, and the disinflation process stays on the right track.”

But, “they should see inflation momentum moderating” before they cut rates, he said.

“The Fed’s economic forecasts embrace the concept recent economic strength is partially a mirrored image of strong labor force and productivity growth,” Mielczarski said. “This enables for faster economic growth without additional inflationary pressure.”

“The stage has been set for an interesting yr with fluctuating rates of interest and election dynamics colliding for an economic showdown reminiscent of the March Madness tournament frenzy,” said Paul Feinstein, CEO and founding father of Audent Global Asset Management. “We have witnessed the market going the other way than the Fed has portrayed.

Gary Siegel contributed to this report.