Weekly Market Commentary

Published February 7, 2017

In the municipal bond market last week there was a light $4.3 billion calendar and more sideways trading in response to Labor Department data, the two-day Federal Open Market Committee meeting and the small trickle of inflows into bond funds. As expected, the Fed kept its rates unchanged, and the markets do not anticipate any increases until June. But some analysts are all aflutter over Footnote #17 in Federal Reserve Chair Yellen’s January 19 speech at the Stanford Institute for Economic Policy Research, which appears to indicate that higher yields are in store even without formal adjustments to the target range. She pointed out that the sheer size of the Federal Reserve’s $4.4 trillion bond portfolio has been placing considerable downward pressure on longer-term interest rates, but that this pressure will “ease” as the average maturity of the holdings declines and the “end-date” for reinvestment draws closer.  On February 1, the Fed’s balance sheet included about $2.5 trillion of Treasuries and $1.7 trillion of mortgage-backed securities (one-third of the market).  The relatively small amount of cash generated by maturing shorter-term debt has so far been reinvested in new Treasury and MBS debt. But this year, an estimated $195 billion in the portfolio will mature. Over the course of 2017, she estimated that this could increase the yield on the 10-year Treasury note by about 15 basis points, all else being equal, and that the change in longer-term yields would be similar to what has historically accompanied two 25 basis point rate hikes.
The City of Anoka, Minnesota took advantage of low prevailing rates last week to refund $40.5 million of non-rated revenue bonds for The Homestead at Anoka and, as noted in last week’s Update, HJ Sims underwrote the financing with a structure that included 2046 term bonds priced with a coupon of 5.00% to yield 5.20%.  In other non-rated financings, the Triple Creek Community Development District in Florida issued $22.6 million of bonds structured with a 2046 maturity priced at 6.125% to yield 6.379%, and the Lakewood Ranch Stewardship District in Florida sold $49.4 million of special assessment revenue bonds for the Lakewood National and Polo Run projects that included 2047 term bonds priced at 5.375% to yield 5.40%. This week, the $7.5 billion slate includes a $242.8 million New York Dormitory Authority transaction for BB+ rated Orange Regional Medical Center, a $26.6 million non-rated California School Finance Authority charter school financing for Rocketship Education and a $7.3 million non-rated Cold Spring, Minnesota refunding for Assumption Home. At this writing, the 10- and 30-year Treasury yields are 2.39% and 3.02%, respectively, and the 10- and 30-year AAA municipal general obligation benchmark yields stand at 2.28% and 3.06%.

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