• Fed raises interest rates 25 bps, causing yields to surge across all maturities.

• Economic indicators of CPI, jobless claims and the housing market index all show positive signs

• As rates rise, muni bond funds continue to suffer with over $2 billion in outflows this week.

• Be sure to review our previous week’s report to track the changing economic situation.

• The Federal Open Market Committee unanimously decided to raise interest rates 25 bps, with a target range of 0.50% to 0.75%. This caused the 2-year Treasury yield to reach the highest level since 2009, as Fed officials signaled a steeper path for borrowing costs in 2017. The committee now expects three rate hikes in 2017, two or three in 2018, and three in 2019.

• Along with the decision to raise rates, the Fed announced its Fed fund rate forecast for the next three years, i.e. at 1.4%, 2.1% and 2.9% in 2017, 2018 and 2019, respectively. These projections are based on GDP growth of around 2% per annum, unemployment levels at 4.5% and inflation of just around 2%.

• Fed’s balance sheet showed a weekly increase of $22.4 billion in assets, bringing the total level to $4.47 trillion. This increased for the second week in a row as the Fed needed to inject liquidity to stabilize the bond market – a move taken in anticipation of this week’s rate hike.

• The weekly change in Money Supply (M2) was -$26.4 billion, as investors moved away from cash and into the roaring stock market and other areas of investment, especially with bond yields starting to look attractive.

• The Consumer Price Index (CPI) was announced Thursday and showed a month-over-month change of 0.2%, meeting consensus figures. The index has had a year-over-year change of 1.7%, indicating that consumer inflation is remaining low. This will allow the Fed to be patient when raising rates.

• Jobless claims continue to run at very low levels, falling 4,000 to 254,000, and below the consensus estimate of 255,000. The four-week average increased by 5,250 to 257,750, which is in line with November’s trend and the year’s positive trend of an improving labor market. This has been one of the indicators that the Fed relied on to increase rates this week.

• The Bloomberg Consumer Confidence Index continues to show signs of improvement, up four-tenths to 45.5. This index continues to grow as consumers feel more positive about the economy, with a strong labor market and stock markets at all-time highs.

• The Housing Market Index continues to grow, hitting the 70 mark and well above the consensus amount of 63. This is the highest level in over 10 years and is led by future home sales. The housing market has been the strongest since the real estate bubble of 2006, but much of that has been attributed to low mortgage rates.

• Both Treasury and municipal yields increased across all maturities, with the Fed officially raising rates 25 bps. While the two-year maturities increased 12 bps in Treasuries and 8 bps in municipals, the 10 year maturities increased 12 bps and 14 bps for Treasuries and municipals, respectively. Increase in yields across the longer 30-year maturities was minimal, with only 2 bps and 7 bps hike for Treasuries and municipals, respectively. In this context, find out what higher interest rates mean for muni bond investors.

• The largest credit spread continues to be in the 5-year maturity, with Treasury yields up 21 bps over municipals.

• With the Fed finally raising rates for the first time in over a year, investors continue to flee from municipal bond funds. Funds showed an outflow of $2.145 billion last week and a total outflow of over $8.5 billion over the last month. Bond funds will continue to see outflows until investors feel less confident in the stock market and the fear of rising rates subsides.

• The city issued over $347 million in bonds that were rated AA+ by Standard & Poor’s and Aa1 by Moody’s. There are three different coupons issued, all maturing in 2046, that are purposed to help fund New York City’s water system that pumps over 1 billion gallons of water a day.

Upgrade

Moody’s Upgrades Harrison, NY GOs to Aaa; Outlook stable: Moody’s upgraded to Aaa from Aa1 the rating on the village’s outstanding General Obligation debt, which totals $67.1 million. This is due to the village’s large and affluent tax base that continues to benefit from ongoing commercial and residential development and a healthy financial position. To explore additional credit reports about other muni bonds issued by the village of Harrison, NY, click here.

Downgrade

Moody’s Downgrades Aldine ISD, TX GOULT to Aa2; Lease Rev to Aa3; Outlook Stable: The Aldine Independent School District’s, TX $124.1 million Unlimited Tax Refunding Bonds, Series 2017 were downgraded with a stable outlook. This is because of a weaker, albeit still strong, reserve position, the Houston metropolitan area’s slow-growing tax base and an elevated but manageable debt burden. Click here to browse through credit reports of other Texas-based muni bond issues.

Using our Moody’s report section, find out what other muni bonds were upgraded or downgraded during the week.

We provide this report on a weekly basis. To stay up to date with muni bond market events, return to our News page.