Public Finance
2/03/2023 Market Commentary
February 03, 2023
Municipal bond yields continued to drop this week, attributable to a light issuance calendar and falling Treasury yields. The 10-Year and 30-Year MMD have now decreased by 51 and 44 basis points, respectively, since the start of the year.
The low volume of bonds coming to market has been key in pushing municipal yields lower. January saw a 17% drop in bond volume compared to January 2022. Higher interest rates and rising construction costs are the primary causes of the drop in supply.
Outflows out of municipal bond mutual funds did return this week, with investors withdrawing approximately $360 million. This snaps a three week streak of inflows into municipal funds.
Tax-exempt yields over the past week
| 10-Year MMD | 30-Year MMD | |
|---|---|---|
| January 27, 2023 | 2.19% | 3.20% |
| February 2, 2023 | 2.13% | 3.13% |
| Change (bps) | -6 | -7 |
Treasury yields were in ‘wait and see’ mode up until Wednesday’s Federal Open Market Committee meeting. At the meeting, the Fed announced another 25 basis point rate hike. The increase was in line with market expectations, and Treasury yields dropped after the announcement. After the meeting, Fed Chairman Jerome Powell stated that the Fed has ‘kept all options on the table for upcoming FOMC meetings’.
While Powell has reiterated his position that the Fed will remain aggressive in their fight against inflation, the market is betting otherwise. Investors believe that the Fed has begun to move away from aggressive rate hikes and are now searching for the optimal federal funds rate using smaller rate increases. Economists are divided on whether there will be any rate hikes after March’s FOMC meeting.
Treasury yields over the past week
| 10-Year Treasury | 30-Year Treasury | |
|---|---|---|
| January 20, 2023 | 3.52% | 3.64% |
| January 26, 2023 | 3.40% | 3.56% |
| Change (bps) | -12 | -8 |
Written by Dan Shaw, Director, Oppenheimer & Co. Inc., Public Finance.
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