MunicipalBonds.com provides information regarding the performance of muni bonds for the past week in comparison with Treasury yields and net fund flows, as well as the impact of monetary policies and relevant economic news.
- Treasury yields remained stable, as all municipal yields increased.
- Higher than expected CPI showed inflation is on the rise.
- Fed President Janet Yellen indicated that rates may rise sooner rather than later.
- Be sure to review our previous week’s report to track the changing economic situation.
High CPI Leads to Fed Looking to Raise Rates Soon
- Fed President Janet Yellen spoke last week and said it would be unwise to wait too long to raise rates if economic growth and inflation continue to rise. If economic indicators continue to remain positive, the Fed may increase rates in March.
- Richmond Fed President Jeffrey Lacker announced Tuesday that the Fed rates need to rise more briskly than the market anticipates, due to the uncertainty of upcoming fiscal policy changes.
- The Fed’s balance sheet declined by $1.60 billion in assets from last week’s $2.4 billion increase, bringing the total level to around $4.46 trillion. This was primarily due to a $15 billion decline in other assets coupled with a decrease of $1.4 billion in Federal agency debt securities. Both of these offset a $15.1 billion increase in mortgage-backed securities.
- The weekly change in Money Supply (M2) increased by $7.7 billion, which was a minor correction from the $16.8 billion decline from the week prior.
- Jobless Claims had a slight increase of 5,000 to 239,000 for the week, but it’s still lower than the consensus amount of 246,000. The four-week average of 245,250 shows signs that the labor market remains incredibly strong.
- The Consumer Price Index rose higher than expected and reported a 0.6% increase on a month-over-month basis. This was almost twice as high as the consensus amount of 0.3% and the highest measure in 4 years. The increase in energy prices led to such a rise in the index. Even on a year-over-year basis, the measure grew to 2.5% from the previous 2.1%.
Keep track of economic indicators that may impact the muni market.
Treasury Yields Remain the Same While Municipal Yields Increase
- Treasury yields remained relatively stable this week, with the only movement coming from the 30-year Treasury, which increased 1 bps to 3.02%. However, municipal yields increased for the week across all maturities. The 2-year AAA-rated yields saw a slight increase of 1 bps, while the 10-year and 30-year AAA-rated yields increased 7 bps and 5 bps, respectively.
- Credit spreads continued to widen in the 30-year maturity space, with municipals continuing to yield higher than the 30-year Treasury by 16 bps. The largest spread remains in the 5-year maturity, with Treasuries yielding 24 bps over its municipal equivalent. 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.
Credit Spread
| Maturity | Treasury Yield | Muni Yield | Spread (in BPS) |
|---|---|---|---|
2-year | 1.19% | 1.09% | 10 |
5-year | 1.90% | 1.66% | 24 |
10-year | 2.41% | 2.38% | 3 |
30-year | 3.02% | 3.18% | -16 |
Muni Bond Funds Continue Positive Run of Inflows
- For the sixth week, municipal bond funds saw an inflow of $468 million. With no expectation of a drastic rise in rates till later in the year, investors are flocking to tax-free income sources.
University of Colorado Hospital Authority Issues Revenue Bond Series
The University of Colorado Hospital Authority issued over $276 million in revenue bonds, with over $141 million in the 2017C-1 and over $134 million in the 2017C-2 issues. Both issues are rated AA- by Fitch, Aa3 by Moody’s and AA- by S&P. The proceeds of the bonds are to be used to fund the University of Colorado’s health system, which consists of an academic medical center and two community hospitals. To browse through credit reports of other muni bonds issued by the state of Colorado, click here.
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Rating Decision Updates on Muni Bonds
Upgrade
Moody’s Upgrades Little Rock’s (AR) GOLT Bonds to Aa1 from Aa2: The upgrade to Aa1 was due to Moody’s analysis of Little Rock’s ability to bring in substantial tax revenue, despite the lack of full faith and credit pledge. To explore additional credit reports about other muni bonds issued by the state of Arkansas, click here.
Downgrade
Moody’s Downgrades New Lenox Community Park District, IL’s GOLT Debt to A3: The A3 downgrade reflects the New Lenox Community Park District’s history of challenged financial operations and extremely limited operating reserves. To explore additional credit reports about other muni bonds issued by the state of Illinois, click here.
We provide this report on a weekly basis. To stay up to date with muni bond market events, return to our News page.
