The Federal Reserve will keep rates low and continue purchasing securities “until the recovery is complete,” Board Chair Jerome Powell said Wednesday. He later added, “we’re a long way from a full recovery,” suggesting the low rates and asset purchase levels won’t change in the near term.
The municipal market was little fazed by the Fed news and firmed by another two basis points Wednesday.
The FOMC will shrug off inflation readings it considers “transitory,” and won’t change monetary policy until inflation meets its 2% goal on an average, he said.
“There has been growing concern over the prospect of tapering asset purchases, which we think is premature,” said Marvin Loh, senior global macro strategist at State Street Global Markets. State Street projects the Fed won’t taper before the middle of 2022, and the Fed will let markets know well in advance.
Powell reiterated the Fed will be “transparent” and communicate any changes well in advance, but discussing “an exit” now is “premature.”
After growth in the summer, Powell said “prices have leveled out recently” and the “economy has been more resilient than expected." Also, vaccines and fiscal policy suggest “an improved outlook for later this year.”
The Fed will ignore short-term spikes in inflation, Powell said in his post-meeting press conference, noting he expects “transient” jumps in March and April, based on low readings in those months in 2020 and a “burst of spending” once the pandemic is over, which will not cause the Fed to act since those gains are “likely to be transient and not large.” He said, “troubling inflation” levels appear “unlikely.”
While inflation may “surge” in the spring, with big jumps in April and May, inflation on a sustained basis should not reach 2%, the Fed’s target, before next year, Frances Donald, global chief economist of Manulife Investment Management, said earlier Wednesday.
The Federal Open Market Committee at its meeting, which ended Wednesday, decided to hold rates near zero and committed to continue purchasing at least $120 billion of securities a month, as the economy and employment “has moderated” recently.
"This is the first time the Fed has referenced a slowing in the pace of the recovery," said Rose Maguire, senior vice president and Treasury manager at Bank Leumi. And its reference to vaccines may mean the slower than expected roll out "is weighing more heavily on the economic outlook than expected, especially with the new strain variants escalating across the globe."
The panel noted “weakness concentrated in the sectors most adversely affected by the pandemic” in its post-meeting statement, and again said it is prepared to use all of its tools, as needed. Employment is a concern for the Fed.
“In his press conference Powell pointed out that nine million remain unemployed from the pandemic, which is more than the total number of lost jobs in the great financial crisis,” said Steve Skancke, chief economic advisor at Keel Point. “He added that when we include those who left the labor force as a result of the pandemic, the U.S. unemployment is 10%.”
But inflation is not yet a worry, as “weaker demand and earlier declines in oil prices have been holding down consumer price inflation," the FOMC post-meeting statement noted.
But in the press conference, Powell wouldn't suggest "a formula" to determine "an acceptable level of inflation," Skancke said, and "the FOMC would use its judgment," and "the Fed knows how to constrain inflation should it get ahead of where they’d like it to be."
The statement was also tweaked to note that not only “the course of the virus,” but progress on vaccinating Americans will determine how the economy grows.
“The Fed’s biggest concern is keeping the economy afloat until we reach a point of broad vaccinations, increased mobility and the return of broad based economic activity,” said State Street’s Loh. “Until then, the Fed will keep policy supportive and judge the pace of growth as it occurs in the second half of 2021.”
Adding vaccines and removing a note about medium-term risks to the outlook suggest a “more concentrated nature of recent pandemic related weakness,” said Brian Coulton, Fitch chief economist. “That said, we are unlikely to hear talk about tapering until well into the second half of the year.”
“Market participants remain uncertain regarding how to interpret the Fed’s asset purchase intentions — and are wary of another quick move in rates — should the economy rebound strongly in the second half of this year,” said Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni. “MBA does indeed forecast for faster economic growth, given the positive news in recent weeks regarding improved vaccine deployment.”
It is unclear, he said if “a burst of inflation, and a quick drop in the unemployment rate [would] be sufficient enough to cause the Fed to at least begin thinking about slowing their asset purchases.”
If the Fed were to consider a taper, markets would react before the Fed moved, he added.
“While the economy remains challenged, Chairman Powell did indicate several developments that could lead to an improved outlook for later this year,” noted Gary Zimmerman, CEO of MaxMyInterest. “We believe that increased consumer savings rates and pent-up demand could lead to inflationary pressures in the second half of 2021, prticularly in travel, hospitality, and other industries that have been ravaged by the pandemic. It will be important to keep a close watch on measures of inflation and unemployment, as these are the key drivers that could impact the timing and path of future rate increases."
The Fed also said it will end overnight repo operations in February, a signal of recovery in short-term dollar funding markets.
Munis strengthen and flows hit records
The municipal market shrugged at the Fed news and triple-A benchmarks firmed by another two basis points Wednesday as a few large new-issues saw immense demand and re-priced by double-digit basis points. The Investment Company Institute reported another $3 billion-plus of weekly inflows, marking the highest inflows since the summer of 2005.
Muni yields in the 10- and 30-year are inching closer to the record lows of August 2020.
Treasuries were lower on the day and muni ratios hovered around Tuesday's levels.
Municipals as a percentage of Treasuries held at 70% in 10 years and 78% in 30 years, according to Refinitiv MMD. Ratios fell one basis point to 69% in 10 years and to 79% in 30, according to ICE Data Services data.
The long end of the municipal market rallied slightly in conjunction with Treasuries, in the second day of market strength.
“The market opened up firm this morning after yesterday’s rally with good follow through during the day,” Robert Roffo, a managing director and portfolio manager at SWBC Investment Company said on Wednesday.
“Both the secondary and primary markets are seeing strong demand regardless of the rich or cheap valuations along the yield curve,” he said.
“The municipal bid side is two to three basis points stronger today driven by the unexpected strength in the Treasury market where the 10-year Treasury has rallied about five basis points directly related to the equity sell off,” a New York trader said Wednesday.
He said market technicals remain strong with a light calendar versus positive cash inflows into the market, however suggested that next week’s calendar will see the arrival of two deals of $1 billion or higher in New York, which should cater to the hearty investor appetite.
Primary market
Barclays Capital Inc. priced $807 million of Los Angeles International Airport revenue refunding bonds for the Department of Airports of the City of Los Angeles (Aa3/A+/AA-/), upsizing the deal from $664.3 million and reducing yields by as much as 11 basis points in a re-pricing. Series A, $408 million of alternative-minimum tax bonds, saw bonds in 2025 with a 5% coupon yield 0.41%, seven basis points better in re-pricing, 5s of 2026 yield 0.52% (7 bps lower), 5s of 2031 at 1.19% (six lower), 5s of 2036 at 1.53% (3 lower) 5s of 2041 at 1.73% (3 lower), 5s of 2046 at 1.81% (10 bps lower), and 5s of 2051 at 1.87% (10 lower). Series B, $398 million of exempt refunding bonds saw 5s of 2025 yield 0.20% (5 bps lower), 5s of 2026 at 0.24% (10 lower), 5s of 2031 0.89% (11 lower), 5s of 2036 at 1.24 (7 lower), 5s of 2041 at 1.46% (11 lower), 5s of 2045 at 1.54% (11 lower), 5s of 2048 at 1.58% (11 lower).
J.P. Morgan Securities LLC priced $560 million of unlimited tax general obligation and refunding GOs for the Board of Education of the City of Chicago (NR/BB-/BB/BBB-/). Bonds in 2021 with a 5% coupon yield 0.80%, 5s of 2022 at 0.95%, 5s of 2030 at 2.07%, 5s of 2031 at 2.16%.
Bonds in 2032 with a 5% coupon yield 2.25%, 5s of 2036 at 2.41% and 5s of 2041 at 2.61%.
UBS Financial Services Inc. priced an upsized $497 million of taxable general obligation refunding bonds for the Metropolitan Government of Nashville and Davidson County, Tennessee, (Aa2/AA//). Bonds were priced at par in 2021 yield 0.12%, 0.78% in 2026, at 1.486% 2031, and 1.786% in 2034.
UBS also priced $131.9 million of tax-exempt general obligation refunding bonds for the issuer with 5s of 2021 yielding 0.07% and 5s of 2026 at 0.34%.
Jefferies LLC priced $175 million of taxable limited tax refunding bonds for Williamson County, Texas (NR/AAA/AAA/NR). All bonds were priced at par with 2022s at 0.14%, 2026 at 0.64%, 2031 at 1.486% and 2033 at 1.656%.
ICI reports $3.8 billion of inflows
Long-term municipal bond funds and exchange-traded funds saw combined inflows of $3.835 billion in the week ended Jan. 20, the Investment Company Institute reported Wednesday.
In the previous week, muni funds saw a revised inflow of $4.037 billion, ICI said.
Long-term muni funds alone had an inflow of $3.241 billion in the latest reporting week after an inflow of $3.341 billion in the prior week.
ETF muni funds alone saw an inflow of $595 million after an inflow of $697 million in the prior week.
Taxable bond funds saw combined inflows of $18.921 billion in the latest reporting week after an inflow of $19.053 billion in the prior week.
ICI said the total combined estimated inflows from all long-term bond funds and ETFs were $22.756 billion after an inflow of $23.090 billion in the previous week.
Secondary market
High-grade municipals were stronger, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields were at 0.09% in 2022 and 0.10% in 2023. The 10-year fell two basis points to 0.69% and the 30-year fell to 1.38%.
The ICE AAA municipal yield curve showed short maturities fell to land at 0.09% in 2022 and 0.10% in 2023. The 10-year fell two basis points to 0.70% while the 30-year yield fell to 1.40%.
The IHS Markit municipal analytics AAA curve showed yields at 0.11% in 2022 and 0.12% in 2023 while the 10-year fell two basis points to 0.69% and the 30-year yield at 1.38%.
The Bloomberg BVAL AAA curve showed yields at 0.08% in 2022 and 0.10% in 2023, down one basis point, while the 10-year fell two basis points to 0.68% and the 30-year yield at 1.40% was two basis points lower.
The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 1.02% and the 30-year Treasury was yielding 1.79% near the close. The Dow fell 718 points, the S&P 500 fell 2.86% and the Nasdaq fell 2.89%.
Economic indicator
Durable goods orders gained 0.2% in December after a 1.2% increase in November, but below the 0.9% rise predicted by economists polled by IFR Markets.
Orders were pulled down by the aircraft category, with fewer airplanes ordered as the travel industry remains troubled by decreased customers during the COVID pandemic.
Orders for non-defense capital goods excluding aircraft, considered a forecast of business’ equipment spending plans, rose 0.6% in the month after a 1.0% gain in November, and the category is 1.7% higher than a year ago.
Christine Albano contributed to this report.
