Public Finance
02/02/2024 Market Commentary
February 02, 2024
In week centered around January’s Federal Open Market Committee meeting, municipal bond yields rallied by as many as 19 basis points. This rally occurred despite the Fed’s decision to hold the federal funds target rate between 5.25% and 5.50%, and despite Fed Chairman Powell’s hawkish tone regarding future rate cuts. Powell stated that while cuts are expected in 2024, they are not guaranteed. He lowered expectations of a rate cut at the March FOMC meeting by saying that the Fed would ‘move carefully’ and continue to look for signs that inflation is moderating. Prior to this week’s FOMC meeting, the market-applied odds of a March cut had risen to as high as 80%. After Powell’s remarks, that figured dropped down below 40%.
Although rate cuts may still be several months off, investors believe that rates have peaked and have been active in trying to lock in today’s yield levels. Investors deposited $1.47 billion into municipal bond mutual funds this week, the first weekly inflow above $1 billion since January 2023. The surge in demand helped fuel this week’s rally.
Tax-exempt yields over the past week
| 10-Year MMD | 30-Year MMD | |
|---|---|---|
| January 26, 2024 | 2.46% | 3.61% |
| February 1, 2024 | 2.28% | 3.42% |
| Change (bps) | -18 | -19 |
Treasury yields also ignored Powell’s hawkish tone, with the 10-year Treasury dropping by 30 basis points since last Friday. The 10-year Muni-to-Treasury Ratio currently sits at 59%, and the 30-year Muni-to-Treasury Ratio currently sits at 83%.
Treasury yields over the past week
| 10-Year Treasury | 30-Year Treasury | |
|---|---|---|
| January 26, 2024 | 4.16% | 4.39% |
| February 1, 2024 | 3.86% | 4.10% |
| Change (bps) | -30 | -29 |
On a positive note, January bond issuance was up year-over-year. January’s volume rose 16%, with a total $27.9 billion brought to market, compared to $24 billion issued in January 2023. The increase in volume is a result of tighter spreads, growing capital needs, and lower federal stimulus dollars.
Written by Dan Shaw, Director, Oppenheimer & Co. Inc., Public Finance.
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