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Munis succumb to macro pressure, USTs weaken further after CPI
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Munis succumb to macro pressure, USTs weaken further after CPI
May 12, 2026 2:11 PM

<img src="https://public.flourish.studio/visualisation/28945452/thumbnail" width="100%" alt="chart visualization" /> Muni yields were cut on Tuesday amid higher-than-expected core inflation and heavy supply, as U.S. Treasuries cheapened and equities ended mixed.

Munis yields rose by up to five basis points, with the largest increases at the front of the curve and the smallest increases in the 20-year range. USTs similarly cheapened by up to five basis points outside of one year.

The week's elevated supply created pressure on yields, according to Cooper Howard, director of fixed income and strategy for Charles Schwab ( SCHW ). The muni market has endured multiple weeks of high supply and the pace of fund flows, which can be used as a proxy for demand, has been slowing, Howard wrote in Schwab's Muni Market Commentary. With supply expected to continue through the summer, it could raise longer-term questions.

"If supply stays elevated and demand slows, muni performance could struggle this year," Howard wrote. "Although the pace of flows has been slowing, we think the tenets that make munis attractive to retail investors — stable credit quality and attractive tax-adjusted yields — will keep flows from substantially turning negative."

<img src="https://public.flourish.studio/visualisation/28945441/thumbnail" width="100%" alt="table visualization" /> <img src="https://public.flourish.studio/visualisation/28945446/thumbnail" width="100%" alt="table visualization" /> CPI data

The consumer price index "shows pressures are now spreading beyond energy, transportation, and food, into larger categories such as services and housing," according to BMO Chief U.S. Economist Scott Anderson. "If the energy price shock doesn't subside soon, we can expect more of the same in the months ahead."

The report will keep the Federal Reserve on hold and could force a change to their easing bias, he said. After the release, he noted, Treasury yields increased, with the two-year and 10-year each up four basis points to 4.00% and 4.45%, respectively.

In addition to rising energy costs, "with the Strait of Hormuz still effectively shuttered, the risk that we are not past the peak of these price pressures is rising," said James McCann, senior economist of investment strategy at Edward Jones. "The good news is that the economy looks resilient to this price shock so far."

The core number is troublesome, said Seema Shah, chief global strategist at Principal Asset Management. "With inflation rising to its highest level since 2023 and looking uncomfortably sticky, alongside a more resilient and dynamic labor market, the case for policy caution has strengthened."

The best-case scenario is the Fed holds rates "for an increasingly long period of time," said Chris Zaccarelli, chief investment officer for Northlight Asset Management, and the worst case being "the next move from the Fed may be a rate hike (albeit not until next year)."

Karen Manna, fixed income investment director at Federated Hermes ( FHI ), said, "Rates — particularly at the front end of the curve — could sell off as investors once again reassess the odds of policy easing. Overall, markets will be unsettled as investors monitor yet another reason for persistent inflation"

New-issue market

In the primary market Tuesday, Loop Capital Markets priced for Atlanta (Aa3/AA-//AA-) $1.33 billion of water and wastewater subordinate lien revenue and revenue refunding bonds, Series 2026, with 5s of 11/2026 at 2.57%, 5s of 2031 at 2.89%, 5s of 2036 at 3.28%, 5s of 2041 at 3.61%, 5s of 2046 at 4.06%, 5s of 2051 at 4.42% and 5s of 2056 at 4.54%, callable 11/2036.

Ramirez priced for Connecticut (Aa2/AA-/AA/AA+) $792.1 million of GOs. The first tranche, $500 million of Series 2026A, saw 5s of 9/2026 at 2.59%, 5s of 2031 at 2.89%, 5s of 2036 at 3.17%, 5s of 2041 at 3.56% and 5s of 2045 at 3.95%, callable 9/2035.

The second tranche, $292.11 million of refunding GOs, Series 2026B, saw 5s of 9/2026 at 2.59%, 5s of 2031 at 2.89% and 5s of 2035 at 3.18%, noncall.

In the competitive market, Fairfax County, Virginia, (Aaa/AAA/AAA/) sold $230.22 million of sewer revenue bonds, Series 2026A, to BofA Securities, with 5s of 7/2029 at 2.55%, 5s of 2031 at 2.69%, 5s of 2036 at 3.08%, 5s of 2041 at 3.46%, 5s of 2046 at 3.98%, 5s of 2051 at 4.27% and 5s of 2056 at 4.41%, callable 7/2036.

Fairfax County also sold to BofA $104.83 million of sewer revenue refunding bonds, Series 2026B, with 5s of 7/2027 at 2.52%, 5s of 2031 at 2.71%, 5s of 2036 at 3.08% and 5s of 2038 at 3.22%, callable 7/2036.

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