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Munichain Market Perspective #3

By Matthew Gerstenfeld
Market Perspective

Primary market activities are set to remain restrained as volatility reverberates throughout equities and fixed income asset classes, triggering recession fears among participants globally. Last week’s FOMC meeting resulted in a widely anticipated 50 basis point rate hike which marked the largest rate adjustment since the early 2000s. Further action on behalf of the Fed outlines a more aggressive approach towards inflation levels, which have peaked to forty year highs and continue to hinder economic success nationwide.

In addition to sequential rate hikes throughout the remainder of the year, the FOMC intends to unwind assets on the balance sheet by nearly $100Bn per month after strategically purchasing debt during the pandemic. The repurchase plan released on behalf of the committee outlined an initial reduction phase spanning US treasuries and mortgage-backed securities beginning next month and accelerating in September. Markets are now prepared for hawkish central bank maneuvers in the coming months as the Fed reinforces tighter monetary policy to strengthen the American economy.

Muni benchmarks registered mixed performance over the course of last week as market participants actively monitor government-led policies to combat surging inflation. US Treasuries bear steepened over the course of the week following the FOMC rate announcement with the largest move registered in the long bond. Muni/UST ratios adjusted accordingly with muni outperformance noted in the 10 and 30 year tenors triggering the 30YR ratio to fall below 100%.

Climbing rates have gained the attention of state and local governments seeking to address financing needs after last year’s historically-low rate environment provided an opportunity for issuers to reduce debt service expenditures. Issuers have showcased greater reluctance to price new offerings given the current state of the market with primary volumes trending lower relative to last year. As the market digests additional rate increases, issuers across the country will be focused on pricing strategies to sufficiently cover financial obligations and maintain operations in a challenging landscape.

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