3/19/2021 Market Commentary
It started off as a quiet week for municipal bonds, with yields holding steady through Tuesday. That changed quickly at the halfway point in the week, with the 10-year and 30-year MMD rising 5 basis points on Wednesday and another 9bps on Thursday.
Tax-exempt yields over the past week:
| 10-Year MMD | 30-Year MMD | |
|---|---|---|
| March 12, 2021 | 1.02% | 1.65% |
| March 18, 2021 | 1.16% | 1.79% |
| Change (bps) | +14 | +14 |
The Federal Reserve’s statement after the Federal Open Market Committee meeting on Wednesday was the primary cause of the jump in rates over the last two days. The Fed voted unanimously to leave the target fed funds rate at near zero, holding on to its stance of keeping rates low until the economy makes a full recovery. Chairmen Powell acknowledged the economic recovery has progressed faster than expected, but stated the recovery has been uneven and incomplete. While the Fed did not waver on their promise to keep rates low, they did increase their projected inflation rate to 2.4% from their earlier 1.8% estimate. The increase in projected inflation was enough to scare Treasury yields, which increased along the curve on Wednesday and Thursday.
Treasury yields over the past week:
| 10-Year Treasury | 30-Year Treasury | |
|---|---|---|
| March 12, 2021 | 1.63% | 2.39% |
| March 18, 2021 | 1.73% | 2.48% |
| Change (bps) | +10 | +9 |
When the Fed’s comments this week caused Treasury yields to rise, Treasury yields pulled tax-exempt yields higher, similar to what we saw happen to the municipal bond market in mid-February. While tax-exempt yields rose sharply this week, it is worth noting that they have still outperformed Treasuries overall since the start of the year. Since January 1st, the 10-year Treasury yield has risen 60 basis points, whereas the 10-year MMD has risen 45 basis points. The difference is even more extreme on the long end, with the 30-year Treasury rising 80 basis points since January 1st, compared to the 30-year MMD only rising by slightly over 40 basis points.
Inflows into municipal bond mutual funds increased to $1.279 billion, beating last week’s mark of $1.092 billion of inflows. As President Biden begins to unveil his plans of increasing the tax rate for higher-earning individuals, demand for tax-exempt municipal bonds is expected to remain strong.
Written by Dan Shaw, Oppenheimer & Co. Inc., Public Finance Associate.
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