Muni and Treasury yields plunge post-FOMC

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Both the municipal and Treasury markets rallied one day after the Fed cut interest rates by 25 basis points and after President Trump's declared more tariffs on China — all of which caused the 10-year Treasury to dip below 1.90%.

Financial markets continue to price in greater odds of another 25 basis point Fed rate cut later this year. According to the CME FedWatch tool, odds a 25 BP rate cut when the Federal Open Market Committee meets on Sept 17-18 increased 70.4% from 51.9% following Trump's tweets of additional tariffs.

"The 10-year hit its lowest level since November 2016 and munis followed right along," said one New York trader. "Yields keep going lower and we are looking at one of the biggest volume weeks we have had in a while next week — it should be very interesting, to say the least."

The move to lower short-term rates this week for the first time in over 10 years — while expected — had some noteworthy drivers, according to Jeffrey Lipton, managing director of credit strategy at Oppenheimer & Co.

The cut is viewed as more about a preemptive strike against the potential effects of global economic weakness and an extended trade conflict, and less driven by measures of U.S. recovery performance, Lipton said in a report.

“We simply do not see the justification for a 50 basis point move given existing fundamental economic and inflation data,” Lipton wrote.

“We are concerned over any actions that could potentially upend financial market stability as well as longer-term growth prospects,” he said.

Although Lipton says it is difficult to gauge the magnitude of global stimulus measures, the firm maintains that the Fed is not embarking on an extended cycle of policy easing — even though additional rate cuts may come later this year, he noted.

“Given the importance of this week’s FOMC meeting, we suspect that several otherwise consequential events and data points — away from unprecedented stimulus offerings from various emerging markets — may not receive adequate recognition and consideration,” he wrote.

Lipton said the firm is not optimistic about reaching a “meaningful” trade deal anytime soon given that both sides have so far not moved on major demands.

In addition, Beijing has demonstrated its resolve to stand its ground in the face of expanding U.S. tariffs, Lipton added.

In other market trends, data and rate moves will drive activity going forward.

“While we do think that the July payrolls print will set the economic tone for the second half of the year, market participants are likely to get caught up in any fresh rounds of liquidity offerings and will be especially focused on the Bank of Japan meeting as pressure mounts to hold interest rates down,” according to Lipton.

A “no-deal” Brexit could result in economic disruption to both the U.K. and the EU, he noted.

“At this time, there is little to no comfort that either side is adequately prepared,” he wrote.

Future growth will closely depend on consumer sentiment and participation, but those contributions may be diluted should trade and a slowing global economy become more disruptive, according to Lipton.

Muni money market funds see another big outflow
Tax-exempt municipal money market fund assets dropped by $1.44 billion, lowering total net assets to $136.20 billion in the week ended July 29, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 191 tax-free and municipal money-market funds increased to 1.01% from 0.90% in the previous week.

Taxable money-fund assets gained $4.72 billion in the week ended July 30, bringing total net assets to $3.107 trillion, the seventh consecutive week that the taxable total has reached or exceeded $3 trillion.

The average, seven-day simple yield for the 810 taxable reporting funds declined to 1.93% from 1.96% the prior week.

Overall, the combined total net assets of the 1,001 reporting money funds rose $3.28 billion to $3.243 trillion in the week ended July 30.

ICI: Muni funds see $2.7B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.711 billion in the week ended July 24, the Investment Company Institute reported on Wednesday.
It was the 29th straight week of inflows into the tax-exempt mutual funds and followed an inflow of $2.533 billion in the previous week.

Long-term muni funds alone saw an inflow of $2.396 billion after an inflow of $2.211 billion in the previous week; ETF muni funds alone saw an inflow of $315 million after an inflow of $322 million in the prior week.

Taxable bond funds saw combined inflows of $7.696 billion in the latest reporting week after inflows of $8.567 billion in the previous week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $767 million after inflows of $10.448 billion in the prior week.

BB indexes move one bps lower
In the week ended Aug. 1, the weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices dipped to 3.67% from 3.68% the previous week.

The Bond Buyer's 20-bond GO Index of 20-year general obligation yields dipped one basis point to 3.42% from 3.43% the week before. It is at its lowest level since Dec. 14, 2017, when it was at 3.41%.

The 11-bond GO Index of higher-grade 11-year GOs was one basis point lower to 2.96% from 2.97% the previous week. It is at its lowest level since Jan. 4, 2018, when it was at 2.94%.

The Bond Buyer's Revenue Bond Index declined one basis point to 3.90% from 3.91% the week before. It is at its lowest level since Dec. 14, 2017, when it was at 3.89%.

The yield on the U.S. Treasury's 10-year sank to 1.90% from 2.08% and the 30-year Treasurys plummeted to 2.44% from 2.60%.

Secondary market
Munis were stronger in late trading on the MBIS benchmark scale, with yields falling by two basis points in the 10-year and by one basis point in the 30-year maturity. High-grades were also stronger, with MBIS’ AAA scale showing yields lowering by two basis points in the 10-year and by three basis points in the 30-year maturities.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year was lower by four basis points and the 30-year GO yield dropped five basis points from 1.49% and 2.20%, respectively.

The 10-year muni-to-Treasury ratio was calculated at 77.9% while the 30-year muni-to-Treasury ratio stood at 89.9%, according to MMD.

Treasuries yields plunged and stocks traded in the red. The Treasury three-month was yielding 2.077%, the two-year was yielding 1.714%, the five-year was yielding 1.668%, the 10-year was yielding 1.886% and the 30-year was yielding 2.434%.

Primary market
Bank of America priced the city of Norfolk, Virginia's (Aa2/NR/NR) $158.355 million of general obligation taxable refunding bonds.

Thursday's bond sale
Norfolk, Virginia pricing

Previous session's activity
The Municipal Securities Rulemaking Board reported 33,214 trades Wednesday on volume of $13.193 billion. The 30-day average trade summary showed on a par amount basis of $10.72 million that customers bought $5.59 million, customers sold $3.19 million and interdealer trades totaled $1.94 million.

California, Texas and New York were most traded, with the Golden State taking 19.635% of the market, the Lone Star State taking 15.311% and the Empire State taking 11.727%.

The most actively traded security was the Texas Private Activity Bond Surface Transportation Corp., 5s of 2058, which traded 33 times on volume of $90.12 million.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.

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