U.S. Muni Market: Munis Hold Tight As Interest Rates Spike

Salt River Project Seeks an Outlet for Its Electric System Revenue Bonds

Interest rate risk will generally continue to confound municipal bond investors in the week ahead, amid uncertainties over U.S.-China trade negotiations, along with several other intensifying global headwinds.

Reports over the weekend indicated that China has asked for another round of talks with the U.S. to discuss the so-called ‘Phase One’ trade deal – a partial resolution to the ongoing trade conflict – which U.S. President Donald Trump had announced Friday.

The progress had reportedly led to the U.S. suspending its planned tariff increase on US$250bn worth of Chinese imports, which was set to go into effect Tuesday, while further levies of 15% on US$160bn of imports slated for December 15 are apparently still on the table.

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News of the ‘Phase One’ deal had helped market participants regain their risk-taking mojo, which had also been spurred along by some upbeat reports on consumer sentiment from the University of Michigan, as well as a solid reading on the domestic labor market.

The yield on the 10-year U.S. Treasury note had risen to 1.76% ahead of the weekend, a 29-basis point increase from its level at the start of September. Also, the inverted spread between the 3-month bill and 10-year note unwound for the first time since its brief positive turn on July 23.

Bond investors mulling the prospects for a final sign-off on the ‘Phase One’ deal are likely growing more skeptical about any substantial progress on the trade front, but the fixed income markets will need to await the reopening of the U.S. Treasury market Tuesday for any sign of impact.

The Securities Industry and Financial Markets Association (SIFMA) has recommended the close of trading of U.S. dollar-denominated government securities, municipal bonds, mortgage- and asset-backed securities, as well as over-the-counter investment-grade and high-yield corporate bonds, and related financial instruments, in observance of the Columbus Day holiday.

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