Municipal bonds strengthened again Wednesday as the Federal Open Market Committee raised the federal funds target rate 25 basis points to a range of 2.25% to 2.5% and signaled it was closer to ending its credit tightening.
The fourth increase this year was approved 10-0. In its new Summary of Economic Projections, or dot plot, the Fed cut its projection for next year to two hikes from the three it predicted in the prior SEP.
The statement added the modifier “some” to its expectations for “further gradual increases” in policy.
The forecast for the neutral rate — an estimate of the level at which economic growth is neither stimulated nor restricted — was reduced to 2.75% from 3%. The panel’s median expectation for the fed funds target at the end of 2021 was lowered to 3.1% from 3.4% in the prior estimate.
Also, as expected, the Fed raised the interest on excess reserves by 20 basis points instead of 25.
In his post-meeting press conference, Federal Reserve Board Chair Jerome Powell said “I don’t believe policy is currently restrictive.”
“There would be circumstances where it would be appropriate to go past neutral,” and there would be circumstances where it is not appropriate, he said.
With the latest rate hike to 2.25% to 2.50%, the Fed has “reached the bottom end of the range” that the committee sees as neutral, suggesting the hiking cycle is closer to its end.
He stressed all rate increases are data dependent and the forecast for 2019 is “positive” following “the best [economic] year since the financial crisis.”
With inflation remaining slightly below target, the Federal Open Market Committee has “the ability to be patient.”
Secondary market
Municipal bonds were stronger on Wednesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields dropped as much as four basis points in the one- to 30-year maturities.
High-grade munis were also stronger, with yields calculated on MBIS' AAA scale decreasing up to six basis points across the curve.
Municipals were stronger on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation lower by two basis points and 30-year muni maturity falling three basis points.
The yield on 10-year Treasurys fell six basis points to 2.76 percent and the 30-year Treasury was below 3.00% as stocks tumbled.
On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 84.5% while the 30-year muni-to-Treasury ratio stood at 102.7%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Primary Market
Piper Jaffray priced the Colorado Health Facilities Authority’s $129 million of improvement and refunding revenue bonds consisting of Series 2018A-1 for the Bethesda project, Series 2018A-2 taxable bonds and Series 2018B second tier bonds. The deal is rated A-minus by S&P Global Ratings.
Wednesday’s bond sale
BlackRock: U.S. bonds provide income, portfolio ballast
In its global investment outlook for 2019, the BlackRock Investment Institute noted rising interest rates have made shorter-term U.S. bonds an attractive source of income. Short-term Treasuries now offer almost as much yield as the 10-year Treasury.
“That’s with one-fifth the duration risk, we calculate. The picture is similar in credit. We are also warming up to longer-term debt as a portfolio buffer against any late-cycle growth scares and a potential source of capital gains should the yield curve invert,” the report says.
Previous session's activity
The Municipal Securities Rulemaking Board reported 49,799 trades on Tuesday on volume of $13.089 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 14.074% of the market, the Empire State taking 12.675% and the Lone Star State taking 11.059%.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
