The municipal market was largely unchanged Friday amid fairly light trading activity in the secondary market.
“There are some bits and pieces trading, but it’s somewhat quiet,” a trader in New York said. “It feels pretty flat out there right now.”
The Treasury market was mixed Friday. The benchmark 10-year note finished at 3.78% after opening at 3.80%. The yield on the two-year note finished at 0.93% after opening at 0.92%. The yield on the 30-year bond finished at 4.71% after opening at 4.73%.
This follows Thursday’s Federal Reserve action raising the discount rate from 0.5% to 0.75%, effective Friday.
Brian Bethune, chief U.S. financial economist at IHS Global Insight, wrote in a report that “it is indeed puzzling as to why the Fed made this move and announcement out-of-cycle with its meeting dates for 2010.”
“While the move to raise the spread of the discount rate over federal funds should, in principle, only be a technical adjustment,” he wrote, “the surprising timing of the move in view of the relatively innocuous comment in the Jan. 27 FOMC minutes, released just Wednesday, caught markets off guard, sending market bond yields up sharply even in advance of the announcement.
“Thus, the surprise factor could have unintended consequences of not only pushing up market rates Feb. 18 and 19, but also fueling speculation that the Fed is already moving on a path to tighten monetary policy earlier than previously expected, and certainly earlier than what was communicated in the press release after the meeting on January 27,” he wrote.
David Kotok, chairman and chief investment officer at Cumberland Advisors, wrote in a report that “the one element which has not been explained is why surprise the markets?”
“If you do surprise the markets, then why go to great lengths to explain that you are not tightening and that the policy is the same as it was before the announcement,” he wrote. “ If it was the same as before the announcement, why make the announcement and why make the changes. It certainly is not the same. Markets know it. The currency exchange rates know it. The Fed knows it. Something happened. Things are different.
“We still do not expect the Fed to hike the Fed funds rate significantly before the end of 2010,” Kotok wrote. “We still believe that the world’s short term interest rates will be between zero and 1% for all for this year and well into next year. We still think that monetary policy must favor an extended period of ease.”
The Municipal Market Data triple-A scale yielded 2.89% in 10 years and 3.83% in 20 years Friday, matching Thursday’s levels. The scale yielded 4.19% in 30 years Friday, matching 4.19% Thursday.
Thursday’s triple-A muni scale in 10 years was at 76.1% of comparable Treasuries and 30-year munis were at 88.2%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 91.9% of the comparable London Interbank Offered Rate.
In economic data released Friday, the consumer price index rose 0.2% in January, after a 0.2% reading the previous month. Economists polled by Thomson Reuters had predicted a 0.3% rise.
Also, the core CPI fell 0.1% in January, after a 0.1% rise the previous month. Economists polled by Thomson Reuters had predicted a 0.1% climb.