Municipal Spreads: Muni yields continue to fall this past week as yields fell by an average of 3.2 basis points across the curve with 10-year notes falling by 2.1 basis points to end the week at 2.49%. With yields falling slightly this past week, munis did underperform Treasuries this past week as the 10-year muni-to-Treasury ratio is now yielding 62.35%, compared to 61.47% from the prior week. We did see the muni curve flatten slightly this past week by 1.9 basis points to end the week at 206 basis points.

According to LSEG Lipper Global U.S. Fund Flows data, we continue to see strong inflows as muni bond funds continue to see inflows as investors added $1 billion to muni bonds funds. This follows the prior week’s inflow of $1.3 billion and marks the fourteenth straight weeks of inflows. This is also the seventh time in eight weeks that we have seen over $1 billion in muni bond inflows.

February saw positive returns of 1.25% for the month, pushing returns to over 2.2% for the year. Last year, returns for the month were .99% and year-to-date returns were at 1.5%. The continued rally in munis is being propelled by strong favorable technicals as well as support from lower Treasury yields and steady investor inflows into mutual funds and ETFs. For the month, we saw 2 basis point bumps in the 2027-2028 maturities while the 2029-2056 only saw a 1-1.5 basis point bump, steepening the muni curve slightly for the month.

While Treasuries experienced some volatility this month due to the Fed shifting it posture to wait and see rather than cutting rates and the Supreme Court ruling on tariffs, the muni market remained unrattled from these events, as we continue to see the muni-to-Treasury ratios remain on the richer side versus historical averages. These ratios reflect strong demand and limited secondary offerings, with the 2-year ration now yielding 59.61%, 5-year ratio now yielding 58.86%, and the 10-year ratio hovering around 62.35% at the end of the month. The 30-year ratio is the only spot on the curve that has underperformed since the start of the month and is now yielding 88.14%, due to a surge in long-term bond supply such as $2 billion University of California issue as well as many long-term buyers waiting on a new Fed Chair.