Bond Market Update
Article Sponsored By Premier Partner: L.J. Hart & Company
The current target Federal Funds Rate is 4.25% - 4.50% following the December 2024 rate cut by the Federal Reserve Board. The rate is down from 5.25% - 5.50% at the beginning of 2024. Although policy makers continue to believe that risks to achieving the Fed’s employment and inflation goals “are roughly in balance,” it is clear from their December benchmark rate forecast that they are becoming increasingly worried about the lack of inflation progress. As a result, the median rate forecast by year end 2025 increased to 3.875% - up from the previous quarter’s 3.375%. That suggests 50 basis points (0.50%) of easing compared with 100 basis points in September as policy makers have essentially pushed out the timeframe for getting back to their 2.00% inflation target. From the inflation perspective, the Fed is expected to slow walk any additional rate cuts.
In review of the U.S. Treasury yield curve below, bond yields have changed from being inverted (short-term yields higher than longer-term yields) to a more normalized slope by year end.
What the graph above (Exhibit A) does not illustrate is the amount of volatility in the bond market between the data points. If the 10-year U.S. Treasury note is isolated and graphed before and after the presidential election, one can see the amount of movement on Exhibit B below. The new Administration’s policies could put added pressure on the national debt as well as launch a trade war – both leading to higher inflation. Thus, causing interest rates to increase at some point. We will have to see how this plays out….
As you can imagine, the municipal bond market has seen the same volatility and the yields throughout the measured maturities are coming down on the short-term, but moving higher on longer dated bonds. The frequently referenced Municipal Market Data (MMD) yield curve on AAA rated municipal general obligation bonds is presented in Exhibit C.
Despite elevated interest rates below the 7 year mark, L.J. Hart & Company has been able to help school districts reduce interest expense by over $15 million through current refundings. These refundings are possible on a tax-exempt basis due to the short call feature the bonds contained when issued in 2020. The Missouri State Auditor bond registration reports for general obligation bonds issued in calendar year 2020 totaled a par value of $1,641,987,695 and consisted of 203 separate issues. Of the 96 underwritten by L.J. Hart & Company in 2020, 82 financings had a five year or shorter call feature, while only 18 of the remaining 107 issues underwritten by other firms were also callable at the five-year point. L.J. Hart & Company firmly believes in the merit of having a short call feature as it provides the greatest overall benefit to the issuer. This benefit is realized through financial flexibility by allowing issuers to redeem debt faster to save taxpayer dollars and accelerate future funding possibilities.
The professional staff at L.J. Hart & Company appreciates this chance to highlight some of the opportunities available to Missouri School Districts in the present municipal bond market. We trust that the data is useful and welcome any questions that develop.
L.J. Hart & Company ("L.J. Hart"), member FINRA and SIPC and registered with the SEC and MSRB, is a wholly owned subsidiary of Commerce Bank, and is a municipal advisor and broker-dealer of municipal securities. Offerings may be distributed by Commerce Brokerage Services Inc. and the Commerce Bank Capital Markets Group (Affiliates). L.J. Hart will remit a portion of the Underwriting Fee (concession) to Affiliates as a fee for distributed bonds. A municipal advisory client brochure that describes the protections available under MSRB rules and instructions on how to file a complaint can be found on the MSRB website at www.msrb.org.
Investments in Securities are NOT FDIC Insured; NOT Bank-Guaranteed and May Lose Value. As an underwriter, L.J. Hart may not provide advice for the investment of bond or lease proceeds. L.J. Hart is not acting as your ‘municipal advisor’ within the meaning of Section 15B of the Securities Exchange Act and does not act in a fiduciary capacity. L.J. Hart does not provide tax advice; please refer to your tax professional. L.J. Hart is not a Portfolio Manager, nor an Investment Advisor.