Weekly and Year-End Market Commentary
During the week ending December 19, the municipal market slowed as the holiday season approached and Treasury rates remained stable or moved lower. Market participants were cautious about pursuing bonds at high valuations. Many investors focused on adjusting their risk exposures, preparing for what is expected to be a more favorable technical environment in January and early February 2026. This positioning comes amid anticipation of challenging liquidity and increased rate volatility in the first quarter of 2026, which could present more attractive investment opportunities.
The week saw total BWIC volume of $12.1 billion, 41% above the five-week average, with the longest maturities showing the largest increase in offerings (+64%). Tax-exempt rates were largely stable, underperforming the 6-9 bps rally in US Treasuries amid consensus employment data and softer inflation. Tax-loss harvesting was a key driver of elevated bid-wanted volumes. The hit ratio remained stable at 54%, and yields on customer purchases were mostly 2-3 bps through ICE marks, indicating healthy two-way secondary market flow.
Fund flows for the week ending December 17 showed $400 million of inflows into weekly reporting municipal funds, driven entirely by ETFs (+$644 million) despite $244 million outflows from open-end funds. This pattern reflects year-end tax-loss harvesting, with inflows continuing for a fourth consecutive week on a combined basis. Year-to-date inflows total $50 billion, with ETFs accounting for $32 billion and open-end funds $18 billion. Inflows are concentrated in longer durations (+$21 billion) and investment grade credits (+$38.4 billion), though this is partly due to asset base sizes.
Late-Year Market Dynamics and 2026 Outlook (12/19/2025)
Late-year trading activity follows a pattern observed in previous Decembers. Investment grade bonds are favored for quality amid issuance lulls, while high-yield bonds reflect some recent spread widening. Some specific bonds, such as Pennsylvania Economic Development/PennDOT Bridges Project 5s due 2057, have traded about three points lower than a month ago. Shorter-dated bonds have outperformed longer maturities by roughly 60 bps. Quality returns between IG and HY bonds show no clear winner, with nominal monthly losses across categories.
Projected municipal bond supply for 2026 is estimated at $600 billion or more, representing about a 10% increase from 2025. This would be the third-largest annual increase since 2020. In 2025, full issuance is expected to be $565 billion, an 11% increase from 2024. General obligation (GO) bond supply was essentially flat relative to 2020 but increased about 20% year-over-year. Revenue bonds saw a larger jump to about $365 billion, the highest annual figure for the market. Growth in sub-revenue sectors is expected to continue, driven by infrastructure needs, including data centers, roads, bridges, airports, and utility upgrades.
