Munis improve despite weak Treasuries; fast rate increase may hurt public finance, Fitch says

By Sheri Kasprzak

New York, April 6 – Top-rated municipals rose on the session Monday with yields on some maturities falling by about 2 basis points, said traders reached in the afternoon.

The improved tone came despite a weaker session for Treasuries. The 30-year Treasury bond yield rose by 8 bps and the 10-year by 7 bps amid continued uncertainty over a long-anticipated Fed rate hike.

Meanwhile, the muni market stands to offer about $7 billion of new issues this week, subdued compared to recent weeks, including last week’s holiday-shortened calendar.

Fitch: Rapid hike could hurt

Elsewhere during the session, Fitch Ratings analysts released a report indicating that a rapid increase in the federal funds rate could negatively impact the public finance arena. A rate hike is expected in mid-2015.

“We expect the average policy rate for 2016 to be 1.6%,” wrote analysts Olu Sonola, Thomas McCormick and Rob Rowan.

“However, we created an interest rate shock scenario impact to gauge how faster rate increases and a decline in the economy would impact state, local and transportation infrastructure issuers. In the interest rate shock scenario, we assumed inflation to peak at 4.5% in 2016, forcing the Fed to raise its annual target rate sharply to 4% in 2016. We also assumed 0% real U.S. GDP growth, unemployment rising steadily to 7% in 2016 and the yield on 10-year Treasuries to reach 5.5%. Under this interest rate shock scenario, we would expect most state budgets to weather the interest rate changes. However, the lack of growth and rise in unemployment would trigger declines in income and consumer spending, which would reduce sales tax revenues.”

Among the other disasters predicted in this extreme scenario are further ratings downgrades for many already-pressured local governments.

North Texas sale set

Heading up the week’s primary calendar, the North Texas Tollway Authority is on tap to sell $871,265,000 of series 2015A system second tier revenue refunding bonds (A3/BBB+/).

The bonds will be sold through J.P. Morgan Securities LLC and Loop Capital Markets LLC.

Proceeds will refund the authority’s series 2008F system second tier revenue refunding bonds.

Topping Tuesday’s negotiated calendar is a $174.18 million offering of taxable bonds from the California Housing Finance Agency.

The bonds (A1/AA+/) will be sold through JPMorgan and are due 2020 to 2030.

Proceeds will refund existing debt.

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