The municipal market faces more volatility after the Federal Reserve decided against reducing its stimulus efforts, as investors and other participants shift their attention to the looming fiscal debate, debt ceiling and the selection of a new Fed chairman.

The Federal Open Market Committee surprised most market participants when it announced that it had decided there was insufficient evidence among recent economic data to merit a cutback in bond purchases or a change of course regarding short-term interest rates.

Muni pros, who’d largely expected the Fed to taper its monthly bond purchases by $10-to-$15 billion, have set their sights on other worries, such as debates about the debt limit on Capitol Hill and the possibility of a government shutdown, said Jennifer Vail, head of fixed income research, U.S. Bank Wealth Management.

“The market is going to switch away from the taper focus and more toward the incoming Fed chair and the fiscal discussion,” she said.

As those debates get more complicated and heated, the tax-exempt market should get more volatile, Vail said. The municipal market will pay close attention as potential budget cuts are likely to have an impact on funding levels to issuers, she said.

“Transportation is one of the more vulnerable sectors,” Vail said, “because it’s an easier one to cut and come to an agreement for all parties.”

Others saw some positive notes emerging from the news. Christian Magoon, chief executive of YieldShares and Magoon Capital said many municipalities have not yet recovered from the substantial declines they’ve had in property- and sales-tax revenues.

Those that are trying to raise funds may view the FOMC announcement as a welcome postponement of what is likely to prompt a jump in borrowing costs.

“That probably gives the municipalities a chance to become healthier, from an economic and tax standpoint; the longer they have, the better,” Magoon said.

Muni fund managers had been making efforts to rein in interest-rate and credit risk and focus on value in anticipation of the taper. Some said they would buy high-grade paper in the intermediate range and use cash to try to capture yield opportunities. Others talked of shortening the duration of their muni funds

“Most of us were probably surprised that the Federal Reserve didn’t announce the start of the tapering process in this announcement,” said Michael Brooks, senior portfolio manager at AllianceBernstein. “They’re trying to calm the marketplace down a little bit right now by saying they’re not ready to do this at this point.”

The market saw a small boost in prices Wednesday following the FOMC announcement. Tax-exempt yields could rally more in the short term, but not dramatically, Brooks said.

“Yields won’t go back down to where they were before the Fed made that initial announcement [to taper bond purchases],” he said.

The FOMC’s words had an immediate effect on the market; muni yields on Wednesday morning were flat to a shade weaker throughout the curve, Municipal Market Data scale reads showed. From 2 p.m., following the FOMC announcement, until the close, they rallied across the curve by as much as seven basis points.

On Thursday, yields fell up to seven basis points. They fell by as much as 10 basis points on the Municipal Market Advisors 5% triple-A benchmark scale read on Wednesday, and up to eight basis points the following day.

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