• As the market expected, the Fed raised interest rates.

• Muni bond funds saw a third week of outflows in a row.

• Credit spreads between Treasuries and AAA-rated municipal bonds shrank after yields declined.

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

• The Federal Market Open Committee met this week and raised interest rates by 0.25% to a target rate of 0.75% to 1.00%.

• Fed Chairman Janet Yellen mentioned that the Fed is targeting 2% inflation rate and that if the economic data continues to show signs of a strong economy, the Fed will raise rates two more times this year.

• Last week, the Fed’s balance sheet increased by $9.7 billion in assets, bringing the total level to around $4.47 trillion. The weekly increase is centered around an $8 billion increase in mortgage-backed securities.

• During the week, money supply (M2) declined by $5 billion, which is a modest decline compared to the $50.9 billion increase last week.

• The Housing Market Index data was 5 points higher than the consensus amount at 71. This is the strongest reading in the economic cycle and indicates the strength of a strong housing market.

• Jobless claims were reported at 241,000 – a slight weekly decline of 2,000. This raises the four-week average to 237,250. However, the number is still considered low, proving that the job market continues to perform strongly.

• The Job Openings and Labor Turnover (JOLTS) report was released on Thursday and came in strong at around 5.63 million; it continues on the positive two-year trend. The hiring trend, which rose 2.6% in the month to $5.440 million, demonstrated one of the best readings of the economic cycle.

• Consumer Price Index data was released on Wednesday and came in as expected by the consensus. On a month-over-month basis, CPI increased by 0.1% while the year-over-year change was 2.7%.
  specifically, exports of both capital goods demand for U.S. services increased for the month.

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

• Treasury yields declined across all maturities, with the 2-year Treasury yield decreasing by 5 bps. The 10-year and 30-year Treasuries also saw decreases from last week’s increases, down by 8 bps and 5 bps, respectively. Shorter term municipal yields increased with the 2-year AAA-rated municipal yield by 4 bps. The 10-year and 30-year AAA-rated municipal yields, on the other hand, increased by 5 bps and 6 bps, respectively.

• Credit spreads tightened from the previous week, with the largest spread still remaining between the 5-year Treasury and the AAA-rated municipal at 33 bps. However, the 30-year AAA-rated municipal continues to yield 9 bps higher than its Treasury equivalent.

Be sure to check our Market Activity section to keep track of daily muni trades and historical trades of muni CUSIPs across the U.S.

• For the third week in a row, municipal bond funds posted outflows of $149 million. With the Fed raising rates during this week’s meeting, investors know that some of their bond holdings are would be negatively impacted.

The biggest new issue of the week was more than $2.7 billion of the State of California Various Purpose General Obligation bonds. The bonds are rated AA- by both Fitch and S&P as well as Aa3 by Moody’s. To browse credit reports of other muni bonds issued by the State of California, click here.

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Moody’s Upgrades Tri-Valley CSD, NY GO’s to Aa3; Affirms Aa3 Enhanced: Moody has upgraded the rating of the Tri-Valley Central School District of New York general obligation bonds to Aa3 from A1. The upgrade currently affects $9.9 million of outstanding debt and was based on the district’s improving tax base, strong financial management and a manageable pension liability. To explore additional credit reports about other muni bonds issued by the Tri-Valley New York area, click here.

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Moody’s Downgrades ProMedica Health System, OH to A1; Outlook Stable: The Ohio-based ProMedica Health System bonds were downgraded by Moody’s to A1 from Aa3, which affects $775 million of outstanding debt. The Health System experienced a large operating loss and liquidity decline in 2016, which negatively impacted operating and capital costs. To explore additional credit reports about other muni bonds issued by the State of Ohio, 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.