PALM BEACH GARDENS, Fla. – As the Federal Open Market Committee raised the fed funds target by 25 basis points this week, market participants said they believe more tightening is yet to come this year.
Of those voting in a Live Market Survey sponsored by National Public Finance Guarantee Corp. at the 2017 National Municipal Bond Summit here Wednesday, nearly half, or 49%, said they expect the Fed to raise interest rates a total of three times in 2017.
Some 45% of the respondents said they expect two rate hikes and 6% expect just one this year.
The market has already built in expectations for interest rates to rise as many as three times this year, according to S&P Global Ratings managing director J.R. Rieger, a panelist commenting as the survey results were released.
Rieger said that Federal Reserve Board Chair Janet Yellen's message Wednesday following the rate increase is that the Fed will continue to be accommodating but also will move up rates "slow and steady."
With the new administration in Washington, much of the conference survey focused on President Donald Trump's plans for regulating the market, health care, trade, tax reform and infrastructure financing.
About 54% of those voting said they think Trump will be successful in rolling back a "modest amount" of the provisions in the Dodd-Frank Act, while 22% believed he will be successful making significant changes.
Academy Securities managing director Curtis Harris said many people will remember the reasons why the Dodd-Frank Act came into being after the financial crisis.
He expects there will be push back to any change in the financial reform regulations.
Most of the survey participants, or 67%, believed that the Trump Administration's tax reform proposals will have limited impact on municipal bonds.
"Congress is very focused on some level of tax reform, but as far as munis I think it will be limited" because of the country's infrastructure needs, Harris said.
Kroll Bond Rating Agency managing director Paul Kwiatkoski said while the tax reform proposals are silent on what to do with tax-exempt bonds, Kroll believes there are potential impacts on credits from proposals to lower the marginal tax rate, broaden the tax base and eliminate the federal deduction for state and local taxes.
Respondents were split on whether the Trump administration and Congress can agree on a significant infrastructure plan, with 54% voting yes and 46% voting no.
Though concurrence on an infrastructure plan would be great, there are many issues "clouding the administration," Harris said.
When asked if trade tariffs proposed by the administration would lead to lower economic activity, 59% of respondents said yes, while 41% said no.
If trade tariffs are imposed, consumers will pay more for goods and there will be lower economic activity, said Ted Galgano, National Public Finance Guarantee Corp.'s managing director of new business development in the southern region.
Some 58% of those who took the survey also said they believe that the use of bond insurance will rise this year, while 28% said the volume would remain the same as last year, and 14% thought market penetration would decrease.
Galgano said he thinks the use of insurance will rise because the AA-rated insurers are much stronger today than the more prevalent AAA-rated insurers before the collapse of the market.
As interest rates rise and spreads widen, some issuers will see more opportunity to wrap their bonds because of the improved savings, Galgano said.
The survey also asked when respondents believed the Affordable Care Act or Obamacare would be modified or repealed.
Of the respondents, 35% said action on the ACA would take place in 2018, 33% said no action would occur, 28% said Congress would get the job done this year, and 5% said there would be a move to implement a single-payer plan.
On whether pension funds rates of return increase by 7% this year, 47% said "not a chance," 38% said no, and 15% said yes.
The National Municipal Bond Summit, sponsored by The Bond Buyer and the Bond Dealers of America, continues through Friday.
