• Job reports blow away expectations and continue to show signs of a strong labor market.

• The Fed continued to maintain interest rates at current target ranges.

• Short-term yields dropped, but longer-term yields increased.

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

• The Federal Open Market Committee met this week and, as expected, kept interest rates within the target range of 0.50% to 0.75%. The market continues to believe the Fed will eventually have two to three rate hikes during this year, but it all depends on the condition of the economy, the job market and inflation measures.

• The Fed’s balance sheet increased $1.0 billion in assets from the week prior, bringing the total level to $4.45 trillion. This week’s increase is based on other assets, which rose $1.4 billion to offset a $0.3 billion decline in unamortized premiums on securities held outright. Before you proceed, you might want to look at different economic indicators that could impact the bond market.

• The weekly change in Money Supply (M2) was positive at $19.7 billion, a minimal decline from last week’s $19.8 billion amount. As the stock market continues to show signs of volatility, many investors have maintained their cash positions until there is a more attractive buying opportunity.

• The ADP Employment Report blew away expectations and came in at 246,000, which is 78,000 higher than the consensus amount. This week’s report is the third highest level in over three years and continues to prove that the labor market is growing stronger.

• The Gallup U.S. Job Creation Index, which measures workers’ perceptions of the job climate where they work, remained strong at +34, slightly above the +33 level since around last May. The reading indicates that more workers believe their employer is bringing on new employees than letting people go.

• In line with a strengthening labor market, jobless claims were reported at 246,000, lower than the consensus 253,000. This week’s reading is 14,000 less than last week’s measure. Besides, the four-week average is now 248,000, which is the third week in a row that the measure was below 250,000.

• The consumer confidence level was slightly lower at 111.8 compared to the consensus of 112.2. This was a slight decrease from December’s very high level of 113.3, but still remains on the higher side due to a strong labor market.

• Shorter-term maturity yields decreased, while longer-term yields continued their uptrend. The 2-year Treasury decreased 2 bps to 1.20% and the 2-year municipal yield decreased 1 bps to 1.12%. The 10-year Treasury and municipal yields also decreased by 2 bps each. The 30-year Treasury yield experienced the biggest increase, growing 3 bps to 3.09%. The 30-year AAA rated municipal yields had a slight uptick, increasing 1 bps to 3.13%.

• Credit spreads widened the most in the mid-maturity range, with the 5-year maturity increasing to 26 bps and the 10-year maturity increasing to 15 bps. The 30-year maturity had municipals continue to yield higher than the 30-year Treasury by 4 bps, and it continues to prove the worth of tax-free investment.

For the fourth week in a row, municipal bond funds continued a positive trend and saw $84 million of inflows. With the stock market beginning to show signs of weakness, investors have been rebalancing their portfolios with tax-free bonds in an effort to reduce volatility.

The city of Chicago has issued over $712 million of bonds and is rated BBB+ by Standard and Poor’s and BBB- by Fitch. The proceeds of the bonds are to fund the city’s 2017 projects, refund or pay interest on a portion of the city’s outstanding GO bonds, and fund certain capitalized interest. To browse through credit reports of other muni bonds issued by the city of Chicago, click here.

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Moody’s Upgrades Taylor, MI’s GOLT to Baa2; Outlook Stable: The upgrade to Baa2 from Baa3 reflect the City of Taylor, MI’s improved liquidity position that reduces near-term operating risks within a relatively weak economic profile. This rating decision impacts $5.2 million of bonds, which are general obligation limited tax (GOLT) bonds issued by the Taylor Building Authority. To explore additional credit reports about other muni bonds issued by the state of Michigan, click here.

Downgrade

Moody’s Downgrades City of Flora, IL’s GO Rating to Ba1: Moody’s downgraded $17.8 million bonds to Ba1 from the City of Flora, IL’s general obligation unlimited tax (GOULT) debt. The rating reflects refinancing risk associated with a sizeable bank loan relative to the city’s liquidity. To view other bonds issued from the City of Flora, IL, click here.

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