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Munichain Market Perspective #2

By Matthew Gerstenfeld
Market Perspective

Primary activity will remain muted this week ahead of the two-day FOMC meeting set to begin on Tuesday, prompting issuers to remain on the sideline ahead of further guidance surrounding monetary policy. As new issue volumes trend lower, market participants continue to analyze evolving technicals given the uptick in volatility and corresponding climb in yields as inflation permeates across the nation. Further action on behalf of the Fed highlights a substantial divergence from the original perspective on economic activity and inflation metrics highlighted in Q4 of 2021.

Market indicators are now pointing towards a 50 basis point rate hike in the upcoming FOMC meeting, marking the largest jump in benchmark rates since the early 2000s. The Fed has recently displayed a more aggressive stance in an effort to foster economic growth with the market calling for a gradual balance sheet reduction in the years to come. Despite government-led policy interventions, concerns surrounding the future state of the economy and return to pre-pandemic operating levels has sparked fear among state and local governments nationwide.

As the market evaluates further action on behalf of the Fed, US Treasuries continue to fluctuate, with nominal movements noted across muni benchmarks in recent weeks. Muni/UST ratios have remained in a tight band with the 30YR ratio settling 100%+, presenting some windows of opportunity for tax-exempt investors seeking to deploy capital in longer-dated maturities.

Lackluster demand for new issue paper has translated into hefty losses for select dealers seeking to unload inventory from the beginning of the year at significantly wider levels. As primary volumes remain light, mutual fund outflows coupled with rising secondary inventory has placed greater strain on the market, with participants struggling to adequately absorb outstanding supply.

Looking ahead, participants will continue to monitor evolving developments stemming from the Fed, with further monetary policy guidance playing a major factor in pricing appetite on behalf of issuers. As rates are expected to climb higher, new issue activity may witness an uptick in the remaining quarters as state and local governments address financing needs and seek to reduce borrowing rates.

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