Public Finance Market Update Trends
Interest Rates on the Rise
Graph 1 (above left) compares Bloomberg AAA interest rates from the beginning of the year to the present. The results first show how much interest rates have risen in the municipal bond market, with interest rates as much as 0.77% higher on the long end of the yield curve. The results also show that the short end of the yield curve has only increased by approximately 0.50%. This indicates that there is some slope returning to the yield curve, allowing issuers to capture value by coming down the yield curve. Graph 2 (above right) studies the BQ benefit in IL by comparing a AA NBQ bond issue with a AA BQ one. This comparison shows that there is no material benefit to BQ bonds in today’s IL bond market, even on the longer end of the yield curve. While this effect was anticipated due to the reduced income tax rate now facing banks and insurance firms (traditionally active purchasers of municipal bonds), the significance of the impact is larger than might have been expected.
Public Finance Market Update: Featured Economic Indicator
U.S. Economy Still Moving Along
U.S. GDP growth remains solid with a reported 3.5% annualized growth rate during Q318 following a strong Q218 pace of 4.2%. Consumer spending and higher inventory levels contributed a substantial boost while lower net exports detracted from growth. Tax cuts continue to stimulate economic activity although we expect the impact to fade in upcoming quarters. While inflation remains moderate, we are monitoring inflation risks closely. The headline and core personal consumption expenditure indexes rose 2.0% in September. Given the economic backdrop, our expectation is for the Fed to increase rates again in December and once more in the first half of 2019.
Source: Bloomberg, Bureau of Economic Analysis
