• Fed Chair Janet Yellen is upbeat about the U.S. economy and sees fewer obstacles to economic growth in the near term.

• Both Treasury and municipal bond yields decreased across all maturities.

• Muni bond funds reversed the 8-week outflow trend and showed inflows of $79 million.

• Be sure to review our previous week’s report to track the changing economic situation.

• Fed Chair Janet Yellen announced that she is upbeat about the U.S. economy and the strong job market, and that there are no short-term obstacles to deal with. She did address several long-term issues, such as widening income inequality and weak growth in labor productivity.

• Last Monday, Atlanta Fed Chair Dennis Lockhart announced that the recovery in the economy is “largely done” and that the Fed should take a step back and focus on longer-term issues.

• Last Thursday, Chicago Fed Chair Charles stated that aggressive fiscal stimulus could push up the economy up 4% in the short run, but eventually raise inflation and hurt the economy for the long term.

• The Fed’s Balance Sheet showed a decrease of $0.6 billion in assets from the week prior, bringing the total level to $4.45 trillion. This movement was very nominal in comparison to the last three weeks, during which the asset level had movements in excess of $17 billion. Before you proceed, you might want to look at different economic indicators that can impact the bond market.

• The weekly change in Money Supply (M2) was positive at $7 billion, but down from the prior week’s $24.5 billion measure. This indicates that investors have decided to slightly halt their selling-off activity, as indicated by relatively flat stock market movement for the week.

• The Labor Market Conditions Index came in -0.3, the first negative measure since May 2016. This measure of tracking labor market activity is compiled of 19 composite data sources by the Federal Reserve. The fact that this measure turned negative despite the U.S. economy at near full employment level indicates the possibility of more slack than suspected.

• Jobless claims came in slightly higher than the week prior, at 247,000, but still below the consensus estimate of 255,000. The four-week average declined by 500 to 256,500, which continues to be a strong measure.

• Monthly change in consumer credit came in positive at $24.5 billion, a high measure indicating an increase in holiday spending. This is higher than the consensus amount of $18.5 billion, indicating that consumers are running up their credit card debt. This is good to boost retail sales figures, but concerning if the credit remains for the long term.

• Monthly change in the Producer Price Index was positive at 0.4%, while the annual change was 1.2%. The measure has shown that inflation, when compared to CPI, remains relatively low. This is one of the measures that the Fed factors in when adjusting interest rates.

• Both Treasury and municipal yields dropped across all maturities. The 2-year, 10-year and 30-year Treasuries all dropped 2 bps from the week before. Municipals had a more drastic drop, with the 2-year dropping 7 bps, 10-year dropping 10 bps, and the 30-year dropping 9 bps.

• The largest credit spread continues to be in the 5-year maturity, with Treasury yields up 25 bps over municipals. However, the 10-year maturity also widened, with Treasury yields up 22 bps over municipals.

• Last week, municipal bond funds reversed the outflow trend and finally showed inflows of $79 million. This is the first time since November 11, 2016 that muni bond funds showed inflows, suggesting that investors have finally factored in rising interest rate expectations.

• The city of Chicago O’Hare International Airport issued over $1 billion in Senior Lien Revenue bonds. There are four different series – D, E, F and G – and are A rated by both Fitch and Standard and Poor’s. The funds are designed to make capital improvements and add modernization to one of the most utilized airport in the country. To browse through credit reports of other muni bonds issued by the City of Chicago, click here.

Upgrade

Moody’s Upgrades Fishkill NY’s GO to A3; Positive Outlook Assigned: The Town of Fishkill NY’s General Obligation bonds had their rating upgraded to A3 from Baa1, affecting $6.8 million of rated GO debt outstanding. The town has shown continued improvement in its financial position and had a rapid recovery from a large deficit position only five years ago. To explore additional credit reports about other muni bonds issued by the New York state, click here.

Downgrade (Review)

Moody’s Places Jefferson Parish Fin. Auth., LA, Single Family Mortgage Revenue Bonds 2007B Under Review for Downgrade: The review for downgrade is based on Moody’s several unsuccessful attempts to obtain information required for review from the trustee. As a result, Moody’s does not possess sufficient information to maintain the existing ratings on the bonds.

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