Municipal Bond Yields Rise Amid Tariff-Fueled Inflation Concerns.

Municipal bonds saw their worst day since April as new inflation data caused traders to reassess expectations for an interest-rate cut in September. The 10-year muni benchmark yield rose 8 basis points to 3.25%. US Treasuries also sold off, with the long end of the curve under pressure due to lack of demand.

Municipal bonds faced their most challenging day since April on Tuesday, July 2, 2025, as new inflation data led traders to reassess expectations for a potential interest-rate cut in September. The 10-year municipal bond benchmark yield rose by 8 basis points to 3.25%, reflecting increased uncertainty about the Federal Reserve's policy direction. US Treasuries also experienced selling pressure, particularly at the long end of the curve, as demand remained lackluster.

The inflation data, released on Tuesday, showed that tariff concerns persisted, but it did not provide enough evidence to warrant a Federal Reserve rate cut in July. The two-year muni-UST ratio was at 62%, the five-year at 63%, the 10-year at 73%, and the 30-year at 92%, according to Municipal Market Data's 3 p.m. ET read. These ratios indicate that municipal bonds are still seen as relatively attractive compared to US Treasuries [1].

Despite the increased yield, municipal bonds remain "well bid," according to Anders S. Persson, Nuveen's chief investment officer for global fixed income, and Daniel J. Close, Nuveen's head of municipals. They noted that the July 1 reinvestment money topped $50 billion, demonstrating the continued demand for bonds. Supply remains heavy, keeping supply and demand in "equilibrium," Persson and Close said [1].

The primary market saw several notable issuances. Morgan Stanley priced for the California Community Choice Financing Authority $1.005 million of term-rate green clean energy project revenue bonds, with yields ranging from 3.96% to 4.67%. Raymond James priced for the New Hampshire Municipal Bond Bank $231.335 million of GOs with yields from 2.54% to 5.01%. BOK Financial priced for the Irving Independent School District $222.155 million PSF-backed unlimited tax school building bonds, with yields from 2.59% to 4.79%. These issuances reflect the ongoing demand for municipal bonds in various sectors [1].

US Treasuries also faced selling pressure, with the two-year UST yielding 3.953% (+5), the three-year at 3.929% (+5), the five-year at 4.048% (+6), the 10-year at 4.484% (+5), the 20-year at 5.016% (+4), and the 30-year at 5.012% (+3) just before the close. The increase in yields suggests that investors are anticipating higher inflation and are demanding compensation for the increased risk [1].

Economists had disparate views about the consumer price index (CPI) data. While year-over-year numbers were up from last month, the month-over-month headline number has come in below expectations for five consecutive months. Although the data "showed some early signs of tariff impact," it was not enough to change the belief that there would be no July rate cut, but it put the focus squarely on September [1].

The summer remains crucial for inflation expectations. The July, August, and September CPI reports will be important hurdles to clear, and if inflation data continues to fall in line with projections, the uncertainty about tariffs will not matter, and a cut in September will be warranted [1].

In conclusion, municipal bonds faced significant challenges on Tuesday, July 2, 2025, due to rising inflation concerns and the reassessment of expectations for a potential interest-rate cut in September. Despite the increased yields, municipal bonds remain well bid, reflecting the ongoing demand for bonds. The summer months will be critical for determining the Federal Reserve's policy direction and the potential for a rate cut.

References:
[1] https://www.bondbuyer.com/news/munis-weaker-ust-yields-rise-after-cpi-report