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

Clarida highlighted that business fixed investment in the U.S. has “slowed notably since last year, exports are contracting on a year-over-year basis, and indicators of manufacturing activity are weakening.” Moreover, global growth estimates “continue to be marked down, and global disinflationary pressures cloud the outlook for U.S. inflation,” which at its current course remains muted.

The FOMC at both its July and September meetings voted to lower the target range for the federal funds rate by 25bps, to what is now 1.75% to 2%.

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Clarida’s rhetoric about the downside risks to the domestic economy was further fueled Friday by The Conference Board’s Leading Economic Index (LE), which fell 0.1% in September after a 0.2% decline in the prior month.

Ataman Ozyildirim, senior director of economic research at The Conference Board, attributed the latest fall to manufacturing sector weaknesses, as well as the interest rate spread, which were only “partially offset by rising stock prices and a positive contribution from the Leading Credit Index.”

Ozyildirim added that the LEI reflects “uncertainty in the outlook and falling business expectations, brought on by the downturn in the industrial sector and trade disputes.”

Muni Market Health Check

Against this backdrop, demand for municipal bonds, ex-exchange-traded funds (ETFs), continues to remain healthy, according to the latest flow of funds data.

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For the week ended October 16, Thomson Reuters/Lipper U.S. Fund Flows posted net inflows into muni bond funds (for the 41st straight week) of around US$1.09bn, down only slightly from the prior week’s US$1.14bn and just south of their weekly average of US$1.15bn since August 7, 2019.

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Also, prices of certain exchange-traded funds (ETFs), such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB), have risen roughly 9.5% and 7.3%, respectively, since their most recent 52-week lows set in early November 2018. However, prices of these ETFs have been trending somewhat lower in recent weeks, in line with the sell-off in U.S. Treasuries.

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The author does not hold any positions in the financial instruments referenced in the materials provided.

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