Municipals finished steady on Wednesday after the Federal Reserve raised its target for the federal funds rate by 25 basis points, the first interest rate hike since 2006.
The vote by the Federal Open Market Committee for a 1/4 point rise was widely expected across financial markets and was mostly factored in to recent price moves.
The last time the Fed raised rates was on June 29, 2006, when it hiked the fed funds target rate by 25 basis points to 5.25%. That was the last in a string of 17 straight interest-rate increases, which had begun in June 2004. In December 2008, after a series of rate cuts during the financial crises in 2007 and 2008, the Fed cut its target rate to between 0% and 0.25%, where it remained until Wednesday.
"The committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective," the Fed said in a statement on Wednesday. "Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent."
The FOMC added that the stance of monetary policy remained accommodative after this increase.
"The Fed delivered about 'as expected' as you could get," said Anthony Valeri, Investment Strategist for LPL Financial. "Yield curve flattening, with short-term bonds lagging as the 'dots plot' was reduced only marginally and less than expected."
Valeri said the statement was marginally dovish by mentioning "gradual" twice while forecasts, including dot plots, were slightly hawkish.
"Forecasts included modest upgrade to 2016 growth and small revision down on inflation."
FOMC members voting for the rate rise were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Top-rated municipal bonds finished steady on Wednesday with the yield on the 10-year benchmark muni general obligation flat from 1.98% on Tuesday, while the 30-year yield was unchanged from 2.89%, according to the final read of Municipal Market Data's triple-A scale.
"The Federal Reserve's interest rate hike…has no immediate credit implications on any municipal finance issuers," Gail Sussman, Managing Director at Moody's Investors Service, said in a statement. "There will be a credit positive impact for housing finance agencies, which will see higher profit margins, greater financing flexibility, and an opportunity to grow loan portfolios in a higher-rate environment. For other municipal bond sectors, higher rates will increase issuers' debt service and capital borrowing costs, and dampen some refunding opportunities."
Moody's added that rising rates will impact pensions.
"Higher interest rates will also positively suppress the present value of unfunded pension liabilities and generate greater interest income for issuers," Sussman said.
Looking ahead, some see the Fed pursuing a slow, but steady, march higher in interest rates.
"We expect policymakers will take it slowly next year, raising rates four times, with the fed funds rate finishing 2016 in a range around 1.25%," Beth Ann Bovino, Chief Economist at Standard & Poor's, said in a statement.
U.S. Treasury bonds were little changed as the yield on the 10-year Treasury fell to 2.25% from 2.29% shortly before the announcement and from 2.27% on Tuesday while the 30-year Treasury yield slipped to 2.96% from 3.01% just before the news and from 3.00% late Tuesday. Short-term rates were higher as the Treasury two-year yield rose to 1.00% from 0.97% on Tuesday.
The 10-year muni to Treasury ratio was calculated on Wednesday at 86.5% compared to 87.5% on Tuesday, while the 30-year muni to Treasury ratio stood at 96.2% compared to 96.8%, according to MMD.
In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.0%, effective Dec. 17.
"In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco," the Fed said.
Primary Market
There was not much new issue action on Wednesday as the market paused while the FOMC met in Washington, D.C.
On Thursday, Barclays Capital is slated to price the Utah Housing Corp.'s $100 million of Series 2015D single-family mortgage bonds. The deal is rated Aa3 by Moody's Investors Service.
Since 2005, the UHC has issued $2.69 billion of debt. The years of 2005 and 2009 saw the most issuance with $363 million and $407 million, respectively. The years of 2011 and 2012 were low years, when the UHC issued $35 million and $61 million, respectively. The UHC has been to market an average of 15.3 times per year since 2005.
