U.S. Muni Market: Munis Caught In Crossfire Of Interest Rate Volatility

Bay Area Toll Authority Adds to Mounting Supply of Taxable Transactions

Issuers of U.S. municipal bonds continue to benefit from ultra-low interest rates, while bondholders recover from recent losses.

Prices of U.S. government debt rose somewhat Monday following reports of a drone attack on Saudi Arabian oil facilities, as nervous investors generally fled to safe haven assets. The yield on the 10-year U.S. Treasury note was last bid at around 1.80% after reaching as high as 1.90% at the market close on Friday.

While geopolitical volatility had resurfaced with the attack on Saudi oil production, other global concerns appear to have eased, including U.S.-China trade tensions. Although the results of discussions between U.S. and Chinese officials remain widely debated, the talks set to resume at the end of the week have inspired some signals of progress – and a return of risk appetite.

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Furthermore, market participants widely expect a 25-basis point rate cut at the conclusion to the Federal Open Market Committee’s (FOMC) meeting Wednesday, which would lower the target range for the fed funds rate to 1.75% to 2%.

The 25bp rate cut probability, according to Bloomberg data, places the decision at close to 95%, with around 5% of estimates calling for a 50bp reduction.

Some analysts foresee Federal Reserve chair Jerome Powell’s justification for the potential lowering of the rate as a continuation of the “mid-cycle adjustment” from July’s meeting while highlighting optimism about the strength of the economy.

Jefferies economists, for example, recently noted that the “bottom-line of the Fed’s approach to policy is that they will do what is ‘appropriate to sustain the expansion’.” They suspect Powell will “reiterate the important relationship between global rates and the Fed’s policy decisions and he will provide a positive outlook on the economy despite the uncertain outlook.”

Any cut by the FOMC would come hot on the heels of the European Central Bank’s (ECB) latest multi-pronged stimulus package to help revive stubbornly low levels of euro area inflation.

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Still, the Fed is faced with the daunting challenge of cutting rates while the U.S. economy continues to indicate decent health – and as the recent surge in oil prices is likely to add to overall inflation levels.

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Disclosure: AUTHOR SECURITY HOLDING: NO POSITIONS. The author does not hold any positions in the financial instruments referenced in the materials provided.

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