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At the Federal Open Market Committee (FOMC) meeting held on June 16th Chair Powell confirmed that a discussion ensued about scaling back bond purchases after releasing forecasts that show they anticipate two interest-rate increases by the end of 2023, projecting a faster than anticipated pace of tightening. The Federal Reserve (Fed) marked up its inflation forecasts through the end of 2023 with price pressures rising 3.4% in 2021. The central bank held the target range for the its benchmark policy rate unchanged at zero to 0.25% where it’s been since March 2020. The next meeting is scheduled for July 28, 2021.
June and July continue to see an imbalance in supply and demand. The municipal market will see a scarcity of bonds being chased by strong inflows from coupon payments and note and bond maturities. Strong and steady asset flows into long-term bond funds, ETF’s and separately managed accounts continue. Issuance levels have not met the steady demand keeping a lid on tax-exempt rates while keeping demand strong and steady in the municipal market. The Fed’s zero rate policy, the appetite for yield and the prospect of higher tax-levels should continue to fuel demand and enable issuers to restructure debt at historic low interest rate levels. The front end of the yield curve, securities maturing one year or less, continues to be anchored by the Fed Funds 0.0% - 0.25% rate policy and strong investor demand.
Ongoing discussions regarding an infrastructure package keep tax-exempt investors and issuers busy as the many adjustments and programs discussed could affect the level of new issuance and different types of securities used for funding. Stay tuned as we will continually provide updates as things move forward.
Our experienced credit team will continue to review our current holdings and any purchases we make going forward. All of the securities purchased receive a minimal credit risk designation prior to purchase and are periodically reviewed for any changes to the credit outlook. We continue to maintain very high grade, liquid portfolios.
Municipal money market funds have seen assets steadily decrease due to investors moving out on the yield curve picking up higher returns as rates remain anchored. The strong liquidity characteristics of the portfolio’s and continued demand have mitigated any affect from the flows. Strong supply/demand technicals will continue to keep short-term municipal market rates at historic lows. The current economic and political environment will prove pivotal in 2021 as fiscal stimulus and budget concerns will highlight the sector.
The SIFMA Index (the 7-day high grade market index comprised of tax-exempt Variable Rate Demand Obligations reset rates that are reported to the Municipal Securities Rulemaking board weekly) has averaged 0.05% the first half of the year. Fixed rate municipal notes continue to see strong demand with six-month notes yielding approximately 0.06%.
All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.
Municipal income may be subject to state and local taxes for out-of-state residents. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.
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