U.S. Muni Market: Fed Rate Cut Could Fuel Further Surge In Taxable Supply

Broward County, FL On Tap With Water and Sewer Revenue Bonds

Optimism about U.S.-China trade talks appeared Monday to outweigh signs of heightened downside risks to the domestic and global economy, reigniting the upbeat risk-taking mood in the financial markets.

The specter of a so-called ‘Phase One’ trade deal – a partial resolution to the ongoing trade conflict – seemed to overshadow more fundamental concerns about slowing global growth, amid deteriorating manufacturing conditions and faltering business expectations.

The yield on the 10-year U.S. Treasury note was bid at around 1.778% intraday Monday, a climb of almost 31 basis points from its multi-year trough of 1.47% at the start of September.

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Municipal bonds had also witnessed a sell-off along with U.S. government debt, as market participants had generally rotated out of fixed-income and into stocks.

The tax-free yield curve had steepened further on Friday, with the yield on the 2-year benchmark note falling about 2.5bps to roughly 1.15%, while the 30-year ended 1.5bps higher at about 2.14%.

Nuveen analysts Bill Martin and John Miller recently noted that while investors had been motivated to sell both municipal bonds and U.S. Treasuries, the activity mainly reflected an “unwinding of ‘panic buying’ over the last couple of months, due to fears of potential recession and consequently much lower rates.”

However, Martin and Miller continue to think municipal bonds remain an “attractive” investment opportunity, despite the selloff, as investors “will likely take advantage of higher yields and a higher new issue calendar through the end of the year,” amid rates that “will stay lower for longer.”

Indeed, the market’s implied probability the Federal Reserve’s Federal Open Market Committee(FOMC) will elect to cut interest rates by another 25bps at the conclusion to its two-day monetary policy meeting on October 30 rose Monday to nearly 90%, a jump of around 20% over the past two weeks.

The chances the FOMC would reduce rates were further boosted by Fed vice chair Richard Clarida’s speech at the CFA Institute’s conference on fixed-income management ahead of the weekend.

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