Municipal bonds turned weaker after the Federal Reserve raised interest rates at the conclusion of its two-day monetary policy meeting on Wednesday.

As expected, the Federal Open Market Committee boosted the federal funds rate target 25 basis points to a range of 1.75% to 2%. What was unexpected was a more hawkish Summary of Economic Projections, or “dot plot,” which now projects two more rate hikes this year.

While many experts expected the Fed to hike four times this year, they weren’t expecting the dot plot to change until the next release, in September.

With FOMC participants narrowly divided between three and four increases this year, all it took was one participant to raise his or her projection.

The statement still mentioned “further gradual increases,” and said policy remains accommodative. It deleted the reference to “for some time” to describe how long the rate will remain below long-term expected levels. The statement also said risks to the outlook are “roughly balanced.”

As for the economic projections, the median estimate for the fed funds rate at the end of 2019 is 3.1%, up from 2.9% in their previous assessment, while the 2020 projection remained 3.4%. Unemployment levels were reduced to 3.6% this year and 3.5% in each of the next two years, down from 3.8% for 2018 and 3.6% the following two years in its March projections.

"This is the biggest change in Fed messaging for quite a long time,” said Fitch's Chief Economist Brian Coulton. “In addition to moving to four rate hikes this year and raising the 2019 interest rate forecast in the projections, we have the removal of the forward guidance on keeping rates 'below long run levels for some time' and the remaining language on 'gradualism' in normalization has been weakened.”

Inflation is now seen at 2.1% this year, slightly above the Fed’s 2% target.

"The Fed sounds more bullish on the economy and has noted the decline in the unemployment rate,” Coulton said, adding that “the growing imbalance in the labor market means that it is only a matter of time before sharper upward pressures on wages start to be seen. We see unemployment falling to 3.4% in 2019, which would be the lowest since 1953."

At a scheduled press conference, Federal Reserve Board Chairman Jerome Powell said the question and answer sessions will be held after every Federal Open Market Committee meeting, beginning in January.

The purpose, Powell said, is to “explain our actions and answer your questions.” He stressed the move is “only about improving communications” and means nothing in terms of speeding up Fed actions. The move was something that had been discussed, with experts saying the move will make each meeting “live.”

Secondary market
Municipal bonds turned mostly weaker after the Fed announcement, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as one basis point in the two- to seven-year, and 10- to 30-year maturities and fell as much as a basis point in the one-year and eight and nine-year maturities.

High-grade munis were mostly weaker, with yields calculated on MBIS’ AAA scale rising as much as one basis point in the two- to six-year and 11- to 30-year maturities, falling as much as one basis point in the one-year and seven- to nine-year maturities and remaining unchanged in the 10-year maturity.

Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed yields rising two basis points in the 10-year muni general obligation and gaining two basis points in the 30-year muni maturity.

Treasury bonds weakened as stock prices moved higher.

On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 83.9% while the 30-year muni-to-Treasury ratio stood at 97.3%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

Previous session's activity
The Municipal Securities Rulemaking Board reported 40,210 trades on Tuesday on volume of $13.307 billion.

New York, California and Texas were the states with the most trades, with the Golden State taking 14.089% of the market, the Empire State taking 12.649% and the Lone Star State taking 7.528%.

Primary market
Primary action was muted for most of the day, as the market waited for the Fed.

JPMorgan Securities restructured the New York City Housing Development Corp.’s $550.55 million of Series 2018C multi-family housing revenue sustainable neighborhood bonds on Wednesday.

The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by S&P Global Ratings.

Citigroup priced the Massachusetts Development Finance Agency’s $432.81 million of Series 2018J revenue bonds for CareGroup.

The deal is rated Baa1 by Moody’s and A-minus by S&P.

In the competitive arena, the West St. Paul-Mendota Heights-Eagan Independent School District No. 197, Minn., sold $116.41 million of Series 2018A general obligation school building bonds under the Minnesota school district credit enhancement program.

Raymond James & Associates won the bonds with a true interest cost of 3.4571%.

This week Union County, N.J., sold $153.2 million of bonds and notes.

On Tuesday, Robert W. Baird won the county’s $93.2 million of Series 2018 bonds with a net interest cost of 2.8905% while on Wednesday Morgan Stanley won the county’s $60 million of bond anticipation notes with an effective rate of 1.603%.

Wednesday’s bond sales

New York:
Click here for the NYC HDC restructuring

Click here for the institutional pricing

Click here for the retail housing deal

Click here for the taxable housing deal

Massachusetts:
Click here for the DFA deal

Minnesota:
Click here for the ISD sale

New Jersey:
Click here for the Union County sales

Bond Buyer 30-day visible supply at $5.49B
The Bond Buyer's 30-day visible supply calendar decreased $1.16 billion to $5.49 billion on Thursday. The total is comprised of $3.24 billion of competitive sales and $2.26 billion of negotiated deals.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.

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