Market Overview

Last week, munis traded in a relatively independent pattern versus USTs — outperforming during selloffs and lagging during UST rallies. The market tone strengthened mid‑week following soft labor indicators that nudged expectations toward earlier Fed easing. Seasonality, refunding dynamics, and persistent cash inflows supported a constructive backdrop across both the short and long ends. By the end of the week, muni performance remained anchored by inflows, lighter‑than‑average BWIC pressure, and active engagement across primary and secondary markets.

Yield & Curve Adjustments

The muni curve steepened materially throughout the week. 1–10yr spreads steepened to ~50bps, with short‑end demand forcing tight ratios (e.g., 2yr AAA/UST at 61%). Longer maturities were the major movers: the 1–30yr MMD curve steepened by 40bps year‑to‑date, and 20–30yr yields outperformed, attracting buyer attention with TEYs above 5.5%–7%, depending on tax bracket. AA 3–5yr yields hovered near 2.25%, presenting modest relative value versus USTs. Overall, volatility in USTs contrasted with a more measured muni yield response, particularly in the intermediate band.

New Issuance

Weekly issuance steadily expanded as competitive and negotiated deals found strong participation. Early in the week, premarketing spreads confirmed broad demand, especially in healthcare and essential services. AA healthcare deals came with 20–25bp concessions, pushing yields into the low 3s, while the $575mm NR/A+ Chicago Transit Authority transaction was expected to price at wider discounts. A standout competitive sale was Aaa/AAA Harford County (MD), drawing 11 bidding groups and pricing flat‑to‑through AAA references.

Later in the week, more diverse sector issuance — District of Columbia GOs, California Water, Wisconsin GOs — supported liquidity for institutional and retail buyers. Although issuance grew, it was well absorbed, aided by strong fund flows and declining BWIC pressures.

Secondary Activity

Secondary flows remained firm all week, with heavy activity concentrated in the 1–3yr and 12yrs+ segments — an evolving “barbell” theme. Short‑duration dealer‑to‑customer flows remained the most active, while long‑dated demand rose as funds extended out the curve. Trading in coupon‑lite structures (1%–2% coupons from 2019–2021 vintages) revealed notable spread dispersion: e.g., Frederick MD 1.75% 2036 at +100/AAA, Hempstead NY 2.125% 2037 at +75/AAA. Meanwhile, traditional 5% coupons continued to benefit from tighter bid‑side activity. Buyers selectively favored discounted structures where TEYs were compelling, particularly in longer maturities.

BWIC volume increased materially throughout the week, culminating in $11bn in the most recent week — 17% above the five‑week average. Early‑week volumes (Feb 2–4) ranged from $1.7bn to $2.4bn, with strong hit ratios and traded yields generally 2–7bps through ICE marks.

Unique Events

• February seasonality: Historically mixed results due to supply/demand mismatch, with February issuance averaging $33bn — but last year exceeding $40bn.
• Coupon structure differentiation: Ultra‑low coupons from 2019–2021 continue to produce spread dislocations versus traditional 5% coupons, especially during rate volatility.
• Curve extension value: Specialty‑state credits and long‑dated high‑grade structures offered meaningful TEY pickup for flexible investors.
• Fund flow transformation: National muni funds recorded 11 straight weeks of inflows, the strongest since 2009, reshaping demand across the curve.
• Lower bid list volumes: 2026 BWIC levels are running 22% lower than 2025, supporting yield resilience.

Outlook for This Week

Expectations point toward a continued constructive tone supported by strong fund inflows, contained BWIC supply, and a steadily expanding new‑issue calendar. Curve steepening may persist as long‑end demand improves and intermediate valuations remain supported by rate‑cut expectations. A potential pickup in issuance — particularly outside high‑grade sectors — could lead to spread differentiation between A‑rated credits and the AA/AAA tier. Investors should watch for additional volatility in USTs as macroeconomic data refines the Fed path. Extension trades and scaled structures are likely to remain centerstage as portfolios position for early‑year reinvestment needs.