Weekly Market Update

Monday, January 9, 2017

Welcome to 2017. The year 2016 may be later defined as one of surprise outcomes, most notably for the Brexit vote and the U.S. presidential election. In addition, the Federal Open Market Committee (FOMC) voted to lift the fed funds rate by 0.25%, to 0.75%, in December with guidance for as many as three additional rate hikes in 2017. A volatile year in the capital markets witnessed a record level of municipal bond issuance, historically low interest rates that reversed course during the last quarter of the calendar year (the U.S. 10-year Treasury note yield touched a record-low 1.323% on July 6, 2016, after Brexit and six months later doubled to 2.641% by December 15, 2016, after the U.S. presidential election), and equities reaching all-time highs with the Dow Jones Industrial Average nearing the 20,000 milestone.

Municipal bond issuance of $445 billion broke the 2010 record of $433 billion. With low rates on long-term borrowing in the middle of the year, issuers were quick to refund bonds before the Fed resumed raising rates. Aside from record-low yields, investors continued to show intense interest in municipals as the first 43 weeks of 2016 saw $51.47 billion of inflows into municipal bond mutual funds. It was not until the week ending October 19 that outflows began, a trend that continued through year-end. The year benefited some asset classes in particular. Approximately $68 billion of high yield municipal bonds were issued, representing 14.7% of all 2016 issuance, the highest proportion since 2009. Investors sought higher returns from this riskier asset class consisting of hospitals, retirement communities, and charter schools, among others.

The first week of 2017 was met with varied economic headlines throughout the world. Markets started digesting the first week of economic news as they prepare for U.S. fiscal stimulus and tax cuts from the incoming Trump administration. Early in the week, Chinese manufacturing data for December was stronger and had markets reacting positively, taking this as evidence of stabilizing economic growth. By midweek, the FOMC’s minutes from December revealed a Fed with a less hawkish stance than markets previously thought, as the Committee expressed uncertainty about the timing of President-elect Trump’s fiscal stimulus as well as concern about a strengthening U.S. dollar’s impact on inflation (the U.S. dollar is near a 14-year record high and has risen more than 5% since Election Day). Ending the week, a lower-than-expected ADP payroll report showed the U.S. private sector created 153,000 jobs in December, falling from 215,000 in November and below the expected 170,000. Finally, the U.S. Labor Department’s report released Friday showed December hiring slowed slightly from the prior month and the unemployment rate rose from 4.6% to 4.7%, in line with expectations and within the Fed’s comfort range. The positive news out of the report was a rise in wages, which reportedly grew 2.9% from December 2015, the fastest pace for wage growth since June 2009. The rise in wages is a hint that a tightening labor market is causing employers to increase paychecks because of greater competition for workers.

The news from the labor market caused U.S. Treasury prices to decline on Friday as the data strengthened the case for higher interest rates. The S&P 500 had a record close for the first time since mid-December and the DJIA was 36 points from 20,000, capping its best week in a month. U.S. crude oil hit an 18-month high early in the week at $55.24, but ended Friday down to $53.99 with the U.S. dollar continuing to weigh on oil and possibly stifling overall inflation in year ahead.

A number of Fed officials on Friday remarked on the number of possible rate increases this year. Cleveland Fed President Loretta Mester and Richmond Fed President Jeffrey Lacker remarked on the possibility of more than three rate hikes in 2017 as faster economic growth and higher inflation may necessitate the Fed raising rates more quickly. On the other hand, Chicago Fed President Charles Evans commented that two hikes is not out of the question and it is possible that three increases take place, while Dallas Fed President Robert Kaplan remarked that raising rates can be accomplished in a “gradual and patient way,” noting that he would like to keep rates low enough to continue to help stimulate the economy. Friday’s remarks kicked off a number of Fed appearances that are scheduled over the next two weeks. There will be nine Fed speakers during the coming week, with Fed Chair Janet Yellen hosting a town hall in Washington, D.C. with educators from across the country on Thursday.

The 10- and 30-year Treasuries closed the week at 2.42% and 3.00%, respectively, down from a respective 2.45% and 3.06% last Friday. The 10- and 30-year AAA MMD closed at 2.24% and 3.00%, respectively, down from a respective 2.31% and 3.04% last Friday. SIFMA reset on Wednesday at 0.68%, down from 0.72% the prior week.

The Bond Buyer 30-day visible supply is at $16.4 billion, with $8.4 billion ($6.4 billion negotiated) expected to come during the week. The week ahead will be the first big week for the municipal bond market as last week’s primary calendar was muted with supply of approximately $3.4 billion, which was out of balance with the January reinvestment demand. Data for the week include mortgage applications, weekly jobless claims, PPI, retail sales, and the University of Michigan Consumer Sentiment Survey. In addition, the week ahead is an important one as a test of international support for the Treasury market with the 3-year note auction of $24 billion on Tuesday, the 10-year note auction of $20 billion on Wednesday, and the 30-year bond auction of $12 billion on Thursday.

Reference Sources: The Bond Buyer, CNBC, Reuters, Bloomberg, The Wall Street Journal, SIFMA, Municipal Market Analytics, and Municipal Market Data.

  1/6/2017 Change*
SIFMA 0.68% -4
LIBOR 0.76% -1
 
AAA Municipal Market Data Rates 
5-Yr. 1.70% -9
10-Yr. 2.24% -7
20-Yr. 2.87% -3
30-Yr. 3.00% -4
 
U.S. Treasury Rates
10-Yr. 2.42% -3
30-Yr. 3.00% -6
 
Municipal to Treasury Yield Ratios 
10-Yr. 92.6% -1.7
30-Yr. 100.0% 0.7
 
Dow Jones 19,964 201
S&P 2,277 38

*Change since 12/30/2016
Sources: Bloomberg Information Systems and Thomson Financial

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The information in this material was prepared by non-research personnel of William Blair & Company, L.L.C. The material is not a research report and was not prepared by the research department of the firm. William Blair does not publish fixed income research. The views expressed are those of the Debt Capital Markets Group and may differ from the views of others at William Blair, including William Blair Research or William Blair Investment Management. William Blair's trading desk may deal as principal in or act as a market maker for issuers discussed herein. The accompanying information was obtained from sources which William Blair believes to be reliable but does not guarantee its accuracy or completeness. The material has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Historical data is not an indication of future results. The opinions expressed are our own unless otherwise stated.

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