Munis were slow to react Wednesday, as the Federal Open Market Committee left rates unchanged. U.S. Treasuries sold off on the long end and equities were lower.
Muni yields richened by up to three basis points or cheapened by up to two basis points, depending on the scale. UST yields were firmer up to the two-year mark, and up to 11 basis points weaker after five years.
Some parts of the muni market are still experiencing a bit of "last week's damage," according to Kim Olsan, senior fixed income portfolio manager at NewSquare Capital. But the market is also benefiting from improved tax equivalent yields, especially past the five-year mark.
"I was surprised to see pretty good activity before the Fed meeting," Olsan said. An FOMC meeting "usually would bring a little bit of a slowdown, but it didn't quite happen. So I think there was a certain amount of cash taking advantage of the new levels."
ICI data
The Investment Company Institute Wednesday reported inflows of $883 million for the week ending July 22, following $1.373 billion of inflows the previous week.
Exchange-traded funds saw inflows of $378 million after $935 million of inflows the week prior, per ICI data.
FOMC
The Federal Open Market Committee voted Wednesday 9-3 to hold the fed funds rate target in a range between 3.5% and 3.75%.
Dissenting votes were cast by Cleveland Fed President Beth M. Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie K. Logan, who wanted a 25-basis-point rate hike.
The statement was mostly the same as after the previous meeting, except for the dissents.
Fed Chair Kevin Warsh called the meeting "collegial and constructive" with "active and robust discussion," and he again asserted the Fed will deliver price stability.
Nominal and real yields rose materially across the Treasury curve since the prior meeting, he said, because "markets responded to real data rather than forward guidance … market participants are learning to play the ball, not the referee."
"For investors, today's meeting supports maintaining a higher-for-longer interest-rate outlook," said Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute. "Short- and intermediate-maturity bonds continue to offer more attractive yields relative to potential interest rate risks in the long-end of the curve."
"While the initial market reaction appears dovish with front end rates rallying, that largely reflects the removal of an unusually high probability of a July move that had been priced going into this meeting," said Daniel Siluk, head of global short duration & liquidity and portfolio manager at Janus Henderson Investors. "September pricing has also moderated from fully priced to roughly 75%, however I would still characterize the outcome as a hawkish hold on balance: the statement was essentially unchanged, growth and inflation language remained firm, and the three dissents in favor of a hike underscore that a meaningful faction of the committee remains concerned about inflation."
"The Fed appears to be running out of patience with above-target inflation, despite recent data coming in cold," said Kay Haigh, global head and CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management. "The committee's growing hawkish sentiment, shown by the three dissents against today's hold, has also likely been exacerbated by the recent flare up in hostilities in the Middle East. A hike in September is finely balanced, with any further action likely dependent on a combination of developments in the Middle East and the next two CPI prints."
"Three dissents is unusual, suggesting the decision to maintain the current target range hinged on a close vote," according the FHN Financial. "We have no way of knowing how many of the nine voting to keep rates unchanged were of two minds."
"With three members dissenting, today's decision to leave rates unchanged certainly looks to have been more of a family fight than a consensus call, validating the finely balanced market pricing heading into the meeting," said Seema Shah, chief global strategist at Principal Asset Management. "The statement offered little new information, but the dissents send a clear message: the Fed is not yet convinced the inflation battle has been won."
New-issue market
In the primary market Wednesday, J.P. Morgan priced for Royal Independent School District, Texas, (Aaa///) $153.96 million of Permanent School Fund Guarantee Program-insured unlimited tax school building bonds, with 5s of 2/2027 at 2.63%, 5s of 2031 at 3.05%, 5s of 2036 at 3.51%, 5s of 2041 at 3.98%, 5s of 2046 at 4.26%, 5s of 2051 at 4.58% and 5s of 2056 at 4.70%, callable 2/2036.
