Municipal Market Commentary: Rising Rates, Energy Volatility, and Credit Watch

• We have been reporting on NYC regarding the change in leadership – yesterday, 3/11, Moody’s lowered its outlook on NYC to negative, citing “sizable and persistent” budget gaps. Moody’s indicated the changes followed the city’s spending expectations, showing larger budget shortfalls than in previous years. If you are buying NYC paper, specifically NYC GOs, it would be wise to discuss the underlying and how the bonds are specifically paid and from what tax base.
• As we also reported this week, Chicago put off a sale of 292MM of bonds it planned to issue this week due to “rising yields” stemming from the conflict in the Middle East. This is to be expected as we have seen yields across the curve +13 on MUNIs, and the 10T has gone from around 3.98% to 4.12%. Should the yields continue to move up across the curve, I would think we will see many more deals “tabled” due to rising costs.
• With higher yields, investors are piling funds into both individual MUNIs and Funds. For example, investors added 1.45B to MUNI bond funds in the week ended 3/4/26, according to the Investment Company Institute. We suspect this trend will continue should yields remain elevated, as this is helping absorb much of the paper seeking a home in the secondary.
• As we saw on 3/11, a key measure of US inflation was tame at the start of the year, but Wednesday’s report on the consumer price index (CPI) showed core inflation, which excludes food and energy costs, was mild both in January and February, which is a present surprise as companies tend to raise prices at the turn of the year. Should we not have had the conflict in the Middle East, with the numbers, many, including us, would have expected yields to fall on this news.
• We have seen energy whipsaw over the past week or so with the conflict. Futures this morning are up ~$6 to around 94 a barrel. This will continue to cause issues for both the bond and equity markets, which we already knew. If you drill down into MUNIs and the payment structures of many issues, I expect you will find safety within that asset class. With that said, just like any other asset class under pressure, yields (as we have reported) are elevated and are likely to remain elevated until the conflict in the Middle East settles down.
• Traders’ hopes for a quick resolution to the conflict in the Middle East are fading, as oil continues to surge. We do not believe this will be a “quick fix” and will most likely drag on for a while…not going to predict how long, but it will be longer than most think. With the 10T trading at 4.23% at the time of this writing, expect all portfolios to bleed for the month of March. We will not see yields move in the opposite direction until we see some stability again.

Bottom Line

Yields are up 13bps, if not slightly higher across the curve. Energy continues to soar and will keep rising in price for obvious reasons. We would advise staying patient, sticking with quality, while seeking out “gems” in the market that could be mispriced. If you are buying taxed-back MUNIs, this should prove to be a safe asset class for your portfolio. Taxes will be paid; the real question will be “how much cheaper will the market get?” Overall, we are seeing longer-dated MUNIs up ~10bps, and we expect these yields to hold if not move up slightly over the course of the next couple of weeks. Finally, remain vigilant in your investment objectives. If you are seeking higher yields, we are seeing those now.