Munis saw small losses, as short-term and intermediate U.S. Treasuries cheapened and equities ended lower following the Federal Reserve's 25-basis-point rate hike.
Muni yields weakened by up to three basis points, depending on the scale.
USTs posted early-day gains, with yields falling until 2 p.m., when the Federal Reserve announced its move and released it Summary of Economic Projections. From there, yields surged during Federal Reserve Chair Kevin Warsh's press conference, erasing the gains for short-term and intermediate USTs, which ended weaker. Longer-maturity USTs still managed to eke out small gains.
In a short post-meeting statement, the panel said the move "will support a timelier return to the committee's 2% goal." The FOMC's dot plot forecasts a second hike later this year.
Market participants broadly expected a rate hike, but the statement and Chair Kevin Warsh's press conference both rang more hawkish than what the markets probably anticipated, said Chris Brigati, managing director and CIO at SWBC.
Some had hoped the Fed fulfilling expectations of a rate hike and committing to fight inflation could stabilize the market and prompt lower yields. Brigati instead expects higher UST rates to last longer — and for munis to follow their lead.
"I do expect this to create the opportunity for still cheaper prices, higher yields in munis in the immediate future," he said. "We saw a little bit of firmness today before the announcement, but the market was still defensive, and I do expect the defensiveness of the muni market to continue, especially if we do foresee the higher interest rate environment that Chair Wash has telegraphed we should expect."
FOMC
The FOMC raised the fed funds rate target 25 basis points — the first since July 2023 — to a range between 3.75% to 4% and forecast another similar increase for later this year.
There were no dissents.
The dot plot in the Summary of Economic Projections showed panelists expect one increase in rates next year. Warsh did not offer his projections.
In his press conference, Warsh said it was "the right decision." When asked about the difference from the last meeting, the chair said the economy strengthened, inflation trends worsened and the geopolitical situation changed.
"The initial bond market reaction was modestly positive, with longer-term rates moving slightly lower after the announcement," said Brian Rehling, co-head of Global Fixed Income and Digital Asset Strategy at Wells Fargo Investment Institute. "The bond market continues to assess the Fed's willingness to raise rates further to meet its 2% inflation objective. In our view, today's action was an important step in maintaining the Fed's credibility in meeting that objective."
Karen Manna, fixed income strategist at Federated Hermes, noted, "Treasury yields have already moved sharply higher as investors repriced inflation risk and higher-for-longer rates. In many ways, the bond market has been leading the Fed rather than the other way around."
But future policy is what matters, she said. "Much of the tightening risk is already priced in but the bigger signal is whether the Fed believes this is enough or the beginning of more to come."
"Given the current economic circumstances, the committee delivered what was needed, and markets are handling it remarkably well," said Jeffrey Roach, chief economist for LPL Financial.
"From our perspective, it was important to see a united Fed which draws a line under any potential market concerns around Fed credibility," said Ross Pamphilon, chief investment officer of fixed income at Impax.
The projected additional increase this year "will be well received by the market," he said. "This was arguably a credibility hike with the Fed passing the test with flying colors."
Daniel Siluk, head of global short duration and liquidity and portfolio manager at Janus Henderson Investors, pointed to the removal of "references to inflation being driven by supply shocks, suggesting policymakers are increasingly focused on broader and more persistent inflation pressures rather than viewing recent price increases as largely transitory or externally driven."
"This is certainly a positive for the market," said Larry Holzenthaler, senior portfolio manager at Catalyst Funds. "It's fair to assume that if the Fed had not acted today it would have caused meaningful strain across markets."
ICI data
The Investment Company Institute Wednesday reported inflows of $45 million for the week ending Sept. 9, following $947 million of outflows the previous week.
Exchange-traded funds saw inflows of $1.23 billion after $705 million of inflows the week prior, per ICI data.
New-issue market
In the primary market Wednesday, BofA Securities priced for the National Finance Authority $386.71 million of municipal certificates, Series 2026-3. The first tranche, $336.44 million of Class A-1 bonds (/AA-//), saw 5.15s of 1/2045 with a tender date of 9/2036 at 5.01%, callable 9/2035.
The second tranche, $42.54 million of Class A-2 bonds (/BBB//) saw 5.15s of 1/2045 with a tender date of 9/2036 at 5.35%, callable 9/2035.
The third tranche, $7.73 million of nonrated Class B subordinate bonds saw 6s of 1/2045 with a tender date of 9/2036 at 10.50%, noncall.
