MunicipalBonds.com provides information regarding the performance of muni bonds for the past week in comparison with Treasury yields, as well as details regarding the net inflow in the muni market.
The markets have anticipated that the Federal Reserve will in fact raise rates this summer ‒ as early as its next meeting in June. Under that framework, interest rates ‒ especially in the shorter maturities ‒ have begun to rise to meet that expectation. Those higher rates were reinforced by overall rising oil prices, housing prices, and equities.
Full Week Bond Market Summary for May 23-27
- All the yield curves for Treasuries and munis rose last week.
- Short-term bonds had the highest yield rally, jumping twenty basis points (bps).
- All credit sectors outperformed similar-duration Treasuries ‒ with junk preferred, bank loans, and other credits moving higher.
- Federal Reserve Chairwomen Janet Yellen drove the sector as her comments indicated there could be a rate hike in June or July.
Detailed Report
- The yield curve continues to flatten; yields across the board rose last week. However, shorter maturities increased more than the longer maturity yields, with the shortest maturity bonds rising the most in recent weeks. This was led by the market sentiment about the upcoming Fed action for a June or July rate hike. Based on economic data, Fed futures now predict the probability of a June hike at 30% and a July hike at 54%.
- Janet Yellen’s comments indicate a possibility for a June hike by a quarter of a percent.
- The muni bond market sold off last week in light trading. However, municipal bond mutual fund and ETF fund flows were $652 million last week. This was the 33rd week of positive flows into muni funds.
- New muni issuance totaled $7.8 billion last week. However, several deals were cheapened in order to be fully subscribed. The new issuance for this upcoming week is a $4.5 billion.
- The State of Connecticut used $500 million worth of general obligation bonds ‒ about $11 million less than originally anticipated, since investors began to fret over the high debts the state is incurring. It is already a high-tax state, so investors have begun to wonder just how much more Connecticut can raise taxes.
- Lawmakers in Illinois voted to override Governor Rauner’s veto of a bill designed to ease the City of Chicago’s pension payments. The veto will provide some relief in the short term, but it creates headwinds and increases the long-term funding gap for Chicago. As a result, the city’s muni issuance was hit hard.
Moody’s Upgrade/Downgrade Ratio
Upgrades:
City of Rogers AR Sewer Revenue Debt:
Moody’s Investors Service has upgraded the rating on the City of Rogers AR Sewer Revenue Debt to Aa2 from Aa3. The new rating reflects the city’s improving debt service coverage, decreasing leverage, and newfound large cash reserves. Additionally, the small scope of the city’s sewer operations within a strong service area helped the increase.
Downgrades:
Pierce County SD. 320 (Sumner), WA’s GOULT Bonds:
Moody’s Investors Service has downgraded the Pierce County School District 320 (Sumner) Washington’s general obligation bonds from Aa2 to Aa3. The downgrade comes from the school district’s weakened financial position, as a result of a large deficit. This significantly reduced available reserves and liquidity. However, Moody’s did highlight the region’s rather wealthy demographic, still allowing it to have an investment grade rating.
Treasury Notes Yield Report
| Year | Yield | +/- BPS in Week | +/- BPS in Month |
|---|---|---|---|
| 2-year | 0.91% | 3 | 13 |
| 5-year | 1.39% | 2 | 9 |
| 10-year | 1.85% | 1 | 2 |
| 30-year | 2.65% | 2 | -3 |
Municipal Index Curve Yields
| Year | Yield | +/- BPS in Week | +/- BPS in Month |
|---|---|---|---|
| 2-year | 0.72% | 5 | 8 |
| 5-year | 1.09% | 7 | 11 |
| 10-year | 1.66% | 3 | 5 |
| 30-year | 2.45% | 2 | -13 |
Yield Ratios – Municipal Bonds vs. Treasury Bonds
| Yield Ratios | Ratio (%) |
|---|---|
| 10-year AAA Municipal vs Treasury | 90% |
| 30-year AAA Municipal vs Treasury | 92% |
Further Reading
How to Invest in U.S. City Bonds talks about why investors should consider U.S. city bonds and how to find bonds that are unlikely to experience problems down the road.
