• Bond prices fell as both Treasury and municipal bond yields rose across all maturities.

• Muni bond funds continued positive inflows for the third week in a row.

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

• Existing home sales fell 2.80% in December to $5.49 million – lower than the consensus of $5.55 million on an annualized basis. Despite a 0.70% increase year-over-year basis, the recent declining trend shows that the real estate sector may be coming to a halt.

• New home sales of 536,000 was lower than the consensus figure of 593,000. This is a 10.40% drop off from the November amount of 598,000 and the year-on-year sales rate declined by 0.40%. Although December’s measure was lower than anticipated, the three-month average is still relatively strong at 568,000.

• The Fed’s balance sheet decreased $7.90 billion in assets from the week prior, bringing the total level to $4.45 trillion. The decrease is due to a decline of $6.40 billion in mortgage-backed securities. 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 $19.8 billion, a large decrease from the $60.3 billion from last week. Investors seem to be gaining confidence with the stock market hitting new highs as they move cash off the sidelines.

• GDP data was released last Friday, with a quarter-over-quarter change of 1.9%. The GDP price index reported 2.1% increase on a quarter-to-quarter basis. Some positives included personal consumption, residential investment and business investment that were up by 2.5%, 10.2% and 2.4%, respectively.

• Jobless claims of 259,000 was more than the consensus figure of 246,000 and the highest in four weeks. However, the four-week average slightly dropped by 2,000 jobs to 245,500. This average is one of the lowest measures in over 40 years, indicating that the labor market is very strong.

• The Bloomberg Consumer Confidence Index remained steady at 45.2; its strong level indicates optimism around the economy and job outlook.

• All Treasury and municipal yields increased for the week, with the 2-year Treasury increasing 3 bps to 1.22% and the 2-year municipal yield increasing 1 bps to 1.13%. Longer-term maturity yields also increased slightly, with both the 10-year and 30-year Treasuries increasing 1 bps each. The 10-year and 30-year AAA-rated municipal yields had more movement, increasing 3 bps and 5 bps, respectively.

• Credit spreads further widened, with the 2-year maturity increasing to 9 bps and the 5-year maturity increasing to 25 bps. On the other hand, the 30-year maturity had municipals yielding 6 bps higher than the 30-year Treasury, and it continues to prove the worth of tax-free investment.

• For the third week in a row, municipal bond funds saw $154 million of inflows. With interest rates now stabilized for the time being and no expected date for the next rate hike, investors are flocking back to the tax-free bond funds.

The state of Wisconsin has issued over $529 million of bonds, of which $367 million is federally taxable. The bonds are rated AA- by S&P, AA- by Fitch and Aa3 by Moody’s. These bonds are being issued for advance refunding of all or a portion of certain maturities of the 2009 Bonds (refunded bonds). To browse through credit reports of other muni bonds issued by the State of Wisconsin, click here.

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Moody’s Upgrades Port of Port Townsend, WA’s GOLT Bonds to Aa3 from A1; Outlook Removed: The Aa3 rating on the Port’s GOLT (general obligation limited tax) $8.6 million in outstanding bonds reflects a large tax base that has been recovering from the recession, a healthy demand for the Port’s services, and the relatively small scale of operations. To explore additional credit reports about other muni bonds issued by the state of Washington, click here.

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Moody’s Downgrades University of West Alabama to Baa1 from A3; Outlook Negative: The University of West Alabama’s (UWA) $25.3 million of the General Fee Revenue Bonds Series 2010-A and Taxable Series 2010-B had a rating decrease to Baa1 from A3 with a negative outlook. This reflects the school’s continued weak operating performance with insufficient cash flow to cover debt service and softening liquidity.

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