2018 has been an interesting year in the Municipal Bond market. It has been the first year since 2013 that we have seen yields rise gradually, yet steadily, as the year has progressed. The year started off with a new federal tax plan and lower corporate tax rates. The lower corporate tax rates caused many institutional municipal bond buyers to re-think their tax-exempt strategy and focus more on taxable investments, thus reducing demand for Municipal bonds. Issuers losing the ability to do advanced refundings has taken quite a bit of supply away from the market. Reduced supply and reduced demand has allowed the Municipal bond market to function orderly in a rising interest rate environment.
What have Municipal interest rates done this year? Put simply, they have gone up. Based on the MMD index (Index is owned and managed by Thomson Reuters), 2 Year is up 51 basis points (bp), 5 Year up 62bp, 10 year is up 75bp, 20 year is up 79bp and 30 year is up 83bp. While rates have gone up significantly this year, 20-year Municipal bonds are still being sold with overall borrowing costs less than 4%. While we are off our lows, the good news for Issuers with upcoming financings is rates are still historically pretty low.
Where are interest rates heading? The Federal Open Market Committee (“FOMC”) has made it clear that they will continue to raise interest rates, absent an unexpected blip in the economy. We have already seen three rate hikes in 2018 and a fourth hike coming most likely at the December FOMC meeting. The notes from the September meeting also point to possibly three rate hikes in 2019. Interest rates are heading higher.
For more information on this topic, or to learn how Baker Tilly municipal specialists can help, contact our team.
Baker Tilly Municipal Advisors, LLC is a registered municipal advisor and wholly-owned subsidiary of Baker Tilly Virchow Krause, LLP, an accounting firm.