December 17, 2019 – After many years of analysts forecasting higher interest rates, Wall Street firms are taking a contrarian position and forecasting LOWER interest rates on the back of a slowing global economy, dovish Federal Reserve and election uncertainties in 2020.

At the Citibank Municipal Conference in New York last week, analysts shocked some institutional investors by reiterating the call for AAA MMD to decline to 1% in 2020, from current levels of 1.42%.

Citi said:

In 2020, we expect that MMD yields will largely follow Treasury rates lower unless there is a mutual fund outflow cycle catalyzed by an outflow cycle in the broader fixed income markets.

Despite the expected challenges to municipal credit in 2020, macro factors, again, will remain the main influences on municipal performance, because our market remains a high-grade market. Also, the reduced role of the individual investor buying directly has taken a significant portion of the independent directionality out of the market. If intermediate and long-term rates move high enough, individual investors may redevelop their influence, but this is unlikely to occur in 2020 or even for the next few years.

Given Citi’s projection for lower tax-exempt rates, savvy public finance bankers are contemplating the backlash that might ensue as issuers have been persuaded by their bankers to “advance-refunded” bonds in preparation for higher rates.

If 10-year MMD does decline to 1%, issuers may experience buyers’ regret as their refunding savings — had they waited and not issued refunding taxable bonds — might be 25-30% higher than what was achieved in 2019, according to an experienced quantitative banker who runs refunding numbers for New York State and the MTA.

Contact Karen Bigelow at KBigelow@buymuni.com.