Municipals were steady after the Federal Reserve on Wednesday 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.
"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 stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% 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 were steady 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 a late 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 said, however, 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. "Rates on municipal variable-rate demand bonds (VRDBs) and similar instruments will likely stay below past averages, encouraging a modest increase in the issuance of VRDBs as long-term rates rise. Bank credit support required for increased VRDB supply will remain accessible."
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%," said Beth Ann Bovino, Chief Economist at Standard & Poor's.
After the news, 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 was at 2.96% from 3.01% just before the news and from 3.00% late Tuesday.
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.
