• Both traders and Fed’s Dudley expect a slight increase in interest rates by year-end.

• Muni funds broke a 54-week streak of inflows with $135.9 million outflows this week.

• Expect big bond issuance of $16.7 billion this week, lead by New Jersey and Alaska.

• Third quarter GDP growth for the U.S. is due to be delivered at week’s end, as economists are predicting a 2.5% growth.

• Consumer prices ticked up 0.3% in September, representing a 1.5% climb on a year-over-year basis, the highest level it has been in two years as U.S. inflation inches closer to the Fed’s 2% target rate. While inflation remains relatively low, municipal bond investors should be cautious when calculating the real return on their investment. High inflationary periods will erode the fixed-rate returns of a municipal bond over a long period.

• The Consumer Confidence Report is due Tuesday, October 25 and is expected to show a slight decline in October after climbing to a nine-year high in September.

• Leading indicators showed a respectable September that rose an expected 0.2%, which included a surge in single-family and multi-family home units. According to Ataman Ozyildirim of Business Cycles and Growth Research at The Conference Board: “The U.S. LEI increased in September, reversing its August decline, which together with the pickup in the six-month growth rate suggests that the economy should continue expanding at a moderate pace through early 2017.”

• As of Friday morning, traders expect a 68.3% chance of an interest rate increase this year, up from 65.9% last week. For bond investors, a hike in interest rates will cause bond prices to go down. Expect longer maturity issues to be more affected than the shorter-term. See the movement in prices between the 2-year and the 30-year charts below.

• On Wednesday, October 19, New York Fed President William Dudley told a gathering that “If we raise the federal-funds rate a quarter of a point, that’s not really that big of a deal.” The bond markets are likely to price in the expected increase, causing an uptick in longer-term yields.

• Treasuries halted their downward momentum, with the yield on the benchmark 10-year note falling six basis points this week to 1.73% on Friday morning.

• Intermediate and long-term Treasury yields fell for the week, due in part to expectations for lower yields abroad stemming from further bond purchases from the European Central Bank.

• For the first time in 55 weeks, net outflows for the municipal market were $135.9 million, compared with $147.3 million of net inflows the prior week. This is likely due to investors looking to decrease their exposure to longer-term bonds with the increasing expectations of interest rates rising toward year’s end. For a quick refresh, check out our previous week’s market update article here.

• The largest outflow within the Lipper Muni Debt Classification was with High Yield Muni debt, for a total of $350 million. As rates are expected to increase, investors are looking to keep the same yield while increasing the overall credit quality of their portfolios. To know what higher yields mean to muni bond investors, check here. To further understand the case of high yield muni bonds, click here to read the case about Illinois.

• An estimated $16.7 billion in bonds goes up for sale this week, with leading deals from New Jersey and Alaska. New Jersey will sell $2.76 billion of highway reimbursement notes through Bank of America Merrill Lynch. Alaska plans to offer $2.35 billion of taxable pension obligation bonds through Citigroup. Despite having the seventh highest total tax revenue in the country, New Jersey received an A2 rating from Moody’s, with only Illinois receiving a lower rating. Alaska on the other hand is much stronger with an Aaa rating, the highest possible from Moody’s.

Upgrade

• Moody’s Upgrades Mt. Diablo USD’s (CA) GO Bonds to Aa2 – Moody’s decision to upgrade is due to the growing tax revenue coming from the large area of Contra Costa county. The positive outlook reflects the expectations of continued population growth paired with a manageable debt position. To learn more about other muni bonds issued by the state of California, click here. You can view the rating history of Mount Diablo Unified School District’s muni bond issues here.

Potential Downgrade

• Moody’s places the Baa3 rating of the Miami-Dade County Industrial Development Authority’s (FL) Industrial Development Revenue Bonds, Series 2015A and Series 2015B under review for possible downgrade. The decision stems from the rental income coming in 22% lower and expenses projected to be 36% higher than anticipated. The $55.98 million of debt is currently being serviced by the property manager, Servitas, which is in the process of determining rental rates for the upcoming years. If Servitas cannot meet the rental needs originally forecasted, Moody’s would be forced to issue a further downgrade for these bonds. To learn more about other muni bonds issued by the state of Florida, click here.

Using our Moody’s report section, find out what other muni bonds were upgraded or downgraded during the week.

We provide this report on a weekly basis. To stay up to date with muni bond market events, come back to our news page here.