Municipals were little changed Thursday along with U.S. Treasuries while equities made gains. Mutual funds saw more outflows while money market funds were back in the black.
The market is in a "seasonal winter softness" period where technicals are weak at the moment, said Jeff Timlin, a managing partner at Sage Advisory.
However, that largely has to do with light staffing and lack of new issuance to give pricing guidance, he said.
"We're dealing with late yearend potential tax-loss selling, which can generate a little bit of volatility there, and/or wider bid-ask spreads," Timlin said.
Despite the holiday lull, investors were still pulling money from mutual funds. Municipal bond mutual funds saw more outflows, as LSEG Lipper reported investors pulled $878.5 million from the funds for the week ending Dec. 25, which follows $859.6 million of outflows the prior week.
High-yield funds saw outflows of $413.6 million compared to the previous week's outflows of $71 million.
The four-week moving average grew to $145.2 million per week of outflows from the previous week's $253.1 million per week average of inflows.
There is still a discrepancy between LSEG Lipper and the Investment Company Institute, which reported outflows of $222 million for the week ending Dec. 18 following $1.04 billion of inflows into municipal bond mutual funds for the week ending Dec. 11. This reporting week ended 18 consecutive weeks of inflows, per ICI data.
Exchange-traded funds saw outflows of $562 million for the week ending Dec. 17 following inflows of $114 million the week prior, per ICI data.
Tax-exempt municipal money market funds saw inflows of $1.477 billion for the week ending Dec. 24, following $3.245 billion of outflows the previous week, bringing the total assets to $133.17 billion, according to the Money Fund Report, a weekly publication of EPFR.
The average seven-day simple yield for all tax-free and municipal money-market funds rose to 3.08% from 2.49% the week prior.
Taxable money-fund assets saw $53.782 billion added to end the reporting week after $12.075 billion of outflows the week prior.
The average seven-day simple yield for all taxable reporting funds was at 4.15% versus 4.27% the week prior.
"The supply that comes to market through the secondary, the BWICs and whatnot, doesn't typically overwhelm because there's no substantial new issuance that would require full participation," Timlin said. "Because it's primarily the secondary supply that's going to drive any movement, typically brokers are more than willing to handle it. So that they don't put any bids on; they just kind of back them off a little bit."
When the market "gets back to work" on Jan. 2, there's typically a wall of money that comes due between maturities and coupon payments that needs to get reinvested, and usually, new issuance doesn't start up again for two weeks, he said.
So there's a two-week window where "it's pretty much dealer inventory that gets taken down, and it's just 'rinse and repeat,'" Timlin said.
The market is somewhat bifurcated now: there's cash sitting on the sidelines, while there's also risk, he said.
The risk markets are going "gangbuster," and munis, which are a defensive asset class, have done quite well because there's been more demand and more money out "floating around in the ether," than supply, according to Timlin.
"That's kind of the backdrop from 2025 is that you're seeing an environment where people are going to be selective with what's going on," he said.
And heading into next year, technicals will improve pretty substantially in January, he said.
The potential record levels of issuance, of $500 billion or more, will be "well received," Timlin noted.
"And even if it's not, at least initially, any price adjustments that come forth will easily be digested," he said.
There's so much money on the sidelines that if it backs off too much, people will deploy some of those cash assets into munis, he said.
"So any volatility about will be short-lived, and valuation should creep back to more fair to richer valuations," Timlin said.
The two-year municipal to UST ratio Thursday was at 65%, the five-year at 65%, the 10-year at 67% and the 30-year at 82%, according to Municipal Market Data's 1 p.m. EST read. ICE Data Services had the two-year at 65%, the five-year at 65%, the 10-year at 67% and the 30-year at 81% at 3 p.m.
AAA scales
MMD's scale was unchanged: The one-year was at 2.86% (unch) and 2.82% (unch) in two years. The five-year was at 2.87% (unch), the 10-year at 3.08% (unch) and the 30-year at 3.92% (unch) at 3 p.m.
The ICE AAA yield curve was little changed: 2.90% in 2025 and 2.84% in 2026. The five-year was at 2.88%, the 10-year was at 3.08% and the 30-year was at 3.87% at 3 p.m.
Bloomberg BVAL was little changed: 2.97% (+1) in 2025 and 2.82% (unch) in 2026. The five-year at 2.90% (unch), the 10-year at 3.14% (unch) and the 30-year at 3.85% (unch) at 3 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.88% (unch) in 2025 and 2.81% (unch) in 2026. The five-year was at 2.87% (unch), the 10-year was at 3.08% (unch) and the 30-year yield was at 3.87% (unch) at 3 p.m.
Treasuries were mixed.
The two-year UST was yielding 4.33% (flat), the three-year was at 4.355% (flat), the five-year at 4.433% (-1), the 10-year at 4.577% (-1), the 20-year at 4.843% (flat) and the 30-year at 4.762% (flat) at 3:30 p.m.
Lynne Funk contributed to this report.
