• Treasury yields drop, as municipals stay stable.

• Regional heads of the Federal Reserve (Fed) indicate there could be three rate hikes this year.

• Jobless claims continue to show that the labor market is very strong.

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

• The Fed’s balance sheet increased by $2.40 billion in assets from last week’s $1.0 billion increase, bringing the total level to around $4.46 trillion.

• The weekly change in Money Supply (M2) decreased by $16.8 billion, a reversal from the last two weeks’ increasing trend.

• On Monday, Philadelphia Fed President Patrick Harker said he would be open to raising interest rates again at the U.S. central bank’s March meeting if growth in jobs and wages continues. He still supports raising rates three times this year, depending on fiscal and economic policies.

• Chicago Fed President Charles Evans spoke on Thursday, and he believes the Fed will raise rates three times in 2017.

• Continuing the previous week’s trend, jobless claims fell by 12,000 to 234,000. This is the lowest measure since November and one of the lowest readings on record. The four-week average continues to drop and is now 244,250, which is the fourth week in a row the measure was below 250,000.

• The International Trade Balance came in lower than expected at -$44.3 billion, but it was better than the consensus -$45.0 billion. This was led by exports that rose 2.7% for the month. More specifically, exports of capital goods and demand for U.S. services increased for the month.

• The Gallup U.S. Consumer Spending measure fell to $88 in January, lower than December’s $105 measure. Although this drop was associated with holiday spending, this measure is the highest January reading since 2008, showing that Americans continue to spend more.

Keep track of economic indicators that may impact the muni market.

• Treasury yields fell drastically across all maturities. The 2-year Treasuries fell 1 bps, while the 10-year and 30-year fell 5 bps and 8 bps, respectively. This is likely attributed to the fact that the eventual rate hikes are not expected for a few weeks. However, municipal yields remained relatively stable with the 2-year AAA-rated yields dropping 4 bps, and the 10-year and 30-year AAA-rated yields remaining unchanged from the week before.

• Credit spreads continued to widen, with the largest spread in the 5-year maturity increasing to 28 bps. The 30-year maturity had municipals continue to yield higher than the 30-year Treasury by 12 bps, proving the worth of tax-free investments. With an expectation that rates will rise this year, the market sees less demand for the longer term Treasury and is more attracted to shorter-term issues.

• For the fifth week in a row, municipal bond funds continued a positive trend and saw $366 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 state of Oklahoma issued over $179 million in Turnpike Authority bonds designed to fund the state’s Driving Forward Program and improve the state’s highway systems. Fitch rated the bonds AA-, while Moody’s and S&P rated the bonds at Aa3 and AA-, respectively. To browse through credit reports of other muni bonds issued by the state of Oklahoma, click here.

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Moody’s Upgrades Vestavia Hills, AL’s GOLT Rating to Aaa from Aa1; Outlook is Stable: The rating upgrade to Aaa reflects the city’s full faith and credit pledge and property tax limitations. The general obligation limited tax (GOLT) rating is at the same level as the issuer rating given this broad revenue pledge, which encompasses all or most of the city’s revenues and not just the revenues generated by property taxes. To explore additional credit reports about other muni bonds issued by the state of Alabama, click here.

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Moody’s Downgrades Oak Lawn, IL’s GO to Baa1 from A2; Outlook is Negative: The village has $61.6 million in GOULT debt outstanding, mainly because of a weak financial position. In particular, the village’s very high and growing unfunded pension liabilities and the sizeable gap between current pension funding levels and amounts that would keep unfunded liabilities from growing further is of concern. To explore additional credit reports about other muni bonds issued by the state of Illinois, click here.

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