Munis were steady on Wednesday despite hawkishness from the Federal Open Market Committee. U.S. Treasuries up to the 10-year sold off and equities plunged.
Muni yields richened by up to two basis points. UST yields cheapened by up to 17 basis points, with the biggest losses around the two-year mark.
Muni yields have fallen roughly the same amount each day this week, ignoring UST moves. Chris Eustance, portfolio manager at J.P. Morgan, attributed some of the discrepancy to light issuance. He also stressed the favorable market conditions for munis, which he said will likely continue to insulate the asset class from economic turbulence.
May and June have seen robust fund flows, despite heavy issuance, Eustance noted, and if the deal to open the Strait of Hormuz holds, lower oil prices should be supportive for munis.
Next week has a less robust calendar, Eustance said, and in July, the market should see net negative supply.
"It's longer funds, it's intermediate funds, it's shorter funds, so it's really that increased issuance has really been met with increased demand," Eustance said. "If the Treasury yields continue to move lower, you'll see a reaction in yields ... overall the market should be well supported."
ICI data
The Investment Company Institute Wednesday reported inflows of $1.776 billion for the week ending June 10, following $1.037 billion of inflows the previous week. Inflows have topped $1 billion each of the past eight weeks.
Exchange-traded funds saw inflows of $655 million after $1.872 billion of inflows the week prior, per ICI data.
FOMC meeting
The FOMC held the fed funds rate
Only 18 of 19 voters submitted projections for the Summary of Economic Projections, leading analysts to surmise that
Core inflation projections were lifted to 3.3% this year (from 2.7% in March) and 2.5% next year (from 2.2%).
The post-meeting statement was much shorter than it has been, with Warsh terming it "simpler." He promised to "deliver" an inflation rate of 2%. He acknowledged changes and foreshadowed more to come.
Warsh announced task forces that will among other things review communications, including the dot plot, the balance sheet and ways to improve data collection. Warsh said he hopes these panels' work will be mostly completed by the end of the year.
"Today's meeting confirms that the Fed's recent hawkish shift was not just about higher energy prices," said Kay Haigh, global head and CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management. "Despite the recent pullback in oil, half of the members of the FOMC expect rate hikes as soon as this year, reflecting strong labor market and inflation data. Our base case remains that the Fed can just about avoid hikes, but the path is narrow and there will be a high premium on the incoming inflation data."
"The statement was short and sweet as Warsh is putting his fingerprints on the Fed," said Jay Woods, chief market strategist at Freedom Capital Markets.
"Warsh may have reshaped the optics - dropping the dot and cutting the statement - but the substance of this FOMC is hawkish," said Seema Shah, chief global strategist at Principal Asset Management.
James McCann, senior economist at Edward Jones, said, "There were some clear signs of new Fed Chair Kevin Warsh putting his stamp on the role today. The press statement was short and terse, providing little in the way of forward guidance, and Warsh himself opted not to provide forecasts for interest rates and the economy, consistent with his view that these are unhelpful signals."
"Like a skilled CEO brought in from the outside to turn a company around, the new Fed chair reiterated his confidence in the existing leadership and practices, but organized committees and working groups to study how things are currently done, setting the stage for far-reaching changes in the future, while allowing adherents of the current way of doing things an opportunity to save face and adjust to the new normal of their own accord, rather than being forced to change immediately," said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
Jeffrey Roach, chief economist at LPL Financial, said, "We are going back to the days of Alan Greenspan when FOMC statements were deliberately minimalist, opaque ('constructive ambiguity'), and focused on actions, not explanations."
Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute, said the message was clear that changes are coming. "The Fed appears to be laying the groundwork for a new policy framework," with forward guidance and the dot plot "could become less central to Fed communication if insights from the task forces increasingly guide investor expectations and policy discussions."
Warsh appears ready to allow "markets to form their own views using real-time data, with policymakers then incorporating those signals alongside incoming economic information," Alvarado said.
New-issue market
In the primary market Wednesday, Goldman Sachs priced for the Black Belt Energy Gas District (A2///) $1.738 billion of gas project revenue bonds. The first tranche, $727.115 million of Series 2026H-1, saw 5s of 1/2027 at 3.53%, 5s of 2031 at 3.94% and 5s of 2034 at 4.30%, callable 10/2033.
The second tranche, $686.37 million of Series 2026H-2-1, saw 5s of 12/2027 at 3.53% and 5s of 2031 at 4%, callable 9/2031.
The third tranche, $325 million of Series 2026H-2-2 SOFR index rate bonds, maturing 12/2031, priced at 67% of SOFR +135 at par, callable 9/1/2031.
