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Why did Fed rates rise and muni rates ease?


After the Fed raised the benchmark lending rate by .25% last week, why are municipal bond rates off .15% across all maturities and credit ratings?

J.T., Florida


James A. Klotz responds:

There is a simple explanation: It’s not just municipal bond rates that have eased lower, the Treasury bond market has reacted in a similar manner.

The reason is, market participants believe that rising short-term rates will slow an already sluggish economy, while inflation has not achieved the Fed’s desired 2% rate and is likely to decline even further. The result is a flattening yield curve.

This curve flattening will likely persist until the growth rate accelerates or inflation starts to heat up.

Jun 21, 2017

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