MUNI Supply Outlook Grows and Fed Faces Data Gaps

• Many are indicating the MUNI bond market will be set for a record supply next year. I have seen as much as 600B predicted in 2026, which is up 4% YOY.  Refunding volume and taxable issuance are expected to remain flat at approximately $112 billion and $36 billion, respectively. Taxable MUNIs could offer you an opportunity to buy quality paper in your tax-deferred accounts while picking up yield and safety. Reinvestment volume is expected to be around 59% of the total supply for 2026; therefore, it will hinge on the economy and rate reductions for 2026 to push yields lower, and supply will not help.
• During the Mayor-elect Mamdani, he promised free childcare and buses, 200K of new units of affordable housing, and city-owned grocery stores, all funded by raising taxes on corporations and the wealthy or borrowing.  These pledges, which created the win for him, will face, in our opinion and others, new fiscal financial issues.  If you are buying NYC paper, be aware of the structure and how they are paid.
• As we have seen, Lisa Cook has indicated she sees the risk of further labor market weakness as greater than the risk that inflation will pick up, but she stopped short of indicating another rate cut next month.  Many are “on the fence” as to whether we see a rate cut in December, and with the lack of data we are seeing (or not seeing), it will make it harder for the FED to determine the course of action.
• US Services activity expanded in October at the fastest pace in eight months on a swift upturn in the growth of new orders.  We, along with others, do not anticipate these numbers to move the needle regarding the FED; however, the latest survey did exceed all expectations from a survey of Bloomberg economists.
• The US Treasury indicated it is not looking to boost sales of notes and bonds until well into next year.  This decision will see the government increasingly relying on bills to fund the budget deficit.  As we know, the White House continues to pressure the FED to move rates down, thus saving interest expense; it was calculated that for every .25% move down in FF, approximately $88B is saved.
• As expected, and as we wrote on October 30, rates have been increasing over the past couple of weeks.  Some of this is due to the “buy the rumor and sell the news” aspect of the rate cut, while others are due to the challenges the US economy is facing in 2026.  Some believe we will see inflation surface, even if that does not materialize. History shows that, as the end of a rate-cutting cycle, traders price in “the next hike.” We are currently too far away from this at this time, but it should be noted.
• To complicate matters, the FED Government shutdown is causing a tremendous lack of data, which the FED relies on to make rate adjustments.  The shutdown will make the October employment report appear weak, as furloughed employees are counted as temporarily unemployed. This will be taken with a “grain of salt,” but nonetheless, it should be watched.
• Assuming the data is not released, this will likely be biased in a dovish direction for the FOMC over the next few weeks and in the December meeting, while failing to provide a clear picture of the underlying economy.  It is also unlikely to face much pushback from the FEDs other mandate, inflation, as the October price data is not expected to be published given the survey was not even collected.
• Challenger job cuts were released on 11/6 – US companies announced the most job cuts in October in over 20 years. US companies announced 153K job cuts last month, the most for any October since 2003, driven by technology and warehousing sectors. Keep in mind that this is not a “tier one” data point the FED uses; however, with the Government shutdown ongoing, it will be used by the FED for the December meeting. The original thought was a 70% chance of a rate cut in December; with these numbers, we, along with others, would expect this number to move up.

Bottom line:

We expect rates to hover around 4.10-4.15% on the 10-year over the next couple of weeks, and as we head into Thanksgiving, we should see yields start to tick down. MUNIs moved up 2bps across the curve 11/5, with longer paper yielding > 4.25% for quality assets. It will be interesting to see how this paper “behaves,” considering another rate cut in December, should that happen (which we think at this point we see a 25bps cut). Overall, we remain buyers of quality, longer-dated paper with around a 5-year call protection, while being mindful of the underlying asset, particularly in NY. Finally, the lack of data will create challenges for the FED, and with the Challenger Jobs numbers coming out today (11/6) showing low job growth, this will be relied on by the FED – rate cut probability should move up.