Public Finance
7/28/2023 Market Commentary
July 28, 2023
Municipal bond yields rose only slightly this week, avoiding the large spike seen in Treasury yields. The fact that rising Treasury yields could only pull municipal bond yields by more than a few basis points demonstrates the strong fundamentals of the municipal market. Municipal yields have remained low due to a supply-demand imbalance. Supply has been low this year, down 27% from last year, and supply has slowed even more in July, a month which typically sees less primary bond issuances.
Demand for municipal bonds has picked up in recent weeks. Municipal bond mutual funds saw $552 million of inflows this week, following $1.04 billion the week prior. July is typically synonymous with bonds maturing, giving investors plenty of reinvestment cash.
Tax-exempt yields over the past week
| 10-Year MMD | 30-Year MMD | |
|---|---|---|
| July 21, 2023 | 2.50% | 3.46% |
| July 27, 2023 | 2.52% | 3.51% |
| Change (bps) | +2 | +5 |
On Wednesday, the Federal Reserve Board announced another 25 basis point rate hike, pushing borrowing rates to their highest level in over 22 years. This marks the 11th rate increase since the Fed began its tightening process in March of 2022. The announcement was widely anticipated, and had already been factored into Treasury yields. Chairman Jerome Powell left the door open for another rate hike at the September FOMC meeting, although the market is currently pricing in a 50% chance that this week’s rate increase will be the last.
Treasury yields spiked on Thursday, a result of some better-than-expected economic data. The U.S. economy grew fast than anticipated in Q2, with gross domestic product rising by 2.4%. The report shows the economy has remained resilient despite the Fed’s aggressive rate-hike campaign. Treasury yields rose by as many as 14 basis points on the news.
Treasury yields over the past week
| 10-Year Treasury | 30-Year Treasury | |
|---|---|---|
| July 21, 2023 | 3.83% | 3.90% |
| July 27, 2023 | 4.01% | 4.05% |
| Change (bps) | +18 | +15 |
Written by Dan Shaw, Director, Oppenheimer & Co. Inc., Public Finance.
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