U.S. Muni Market: Market Loses Some Luster As Rates Gyrate

New Jersey’s Transportation Trust Fund Authority to Bring US$950m Blockbuster Bond

While U.S. municipal bond issuance has generally faced pressure from the effects of geopolitical headwinds and slowing global growth, demand for the asset class has remained intact.

Prices of U.S. government debt rose somewhat Monday after IHS Markit noted contraction in Germany’s economy in September, driven by a deeper downturn in the nation’s manufacturing sector, as well as a loss of steam in its service industry.

IHS Markit said its Flash Germany Manufacturing PMI read 41.4, signaling “the sharpest decline in business conditions across the goods-producing sector since the depths of the global financial crisis in mid-2009.”

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In response, the yield on the 10-year German Bund had fallen roughly 6 basis points to -0.58% early in the New York trading session.

Meanwhile, uncertainties over whether the European Central Bank’s (ECB) latest stimulus measures will be effective in helping to accelerate growth in Germany and across the broader euro area, appear to be met with skepticism about the path of monetary policy at other central banks, including the U.S. Federal Reserve.

The Federal Open Market Committee (FOMC) last week cut the target range for the federal funds rate by 25bps to 1.75-2%, amid weaker business fixed investment and exports since its July meeting, as well as below-target inflation.

Market participants honed-in on Fed members’ divided views on the decision, with chair Jerome Powell, vice chair John Williams, Michelle Bowman, Lael Brainard, Richard Clarida, Charles Evans and Randal Quarles in favor, while James Bullard preferred to lower rates by 50bps, and Esther George and Eric Rosengren each wanted to maintain the target range at 2-2.25%.

Analysts at J.P. Morgan noted that overall, “the message from the Federal Reserve seemed divergent and paints an unclear picture on whether we will have zero, one or multiple cuts ahead.” They added that given “the lack of clarity about the Fed’s next move, in addition to other market uncertainties, investors should prepare for more volatility ahead.”

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