Effects of Interest Rates on Municipal Securities
/The Federal Reserve recently announced that they would be cutting interest rates. Today we will be discussing what that means for municipal securities.
The Federal Reserve, also referred to as the Fed, is the central bank for the United States of America and are tasked with primarily setting monetary policies to maintain a stable economy. This includes setting the federal funds rate, which is the interest rate that banks charge each other for overnight borrowing of money.
When the Fed announces increases or decreases in interest rates, it drives the market demand for municipal securities, such as general obligation bonds, issued by California school and community college districts. The change in demand by investors leads to different overall borrowing costs for municipal securities issued by California school and community college districts. Increased demand leads to lower interest rates and lower overall borrowing costs and decreased demand leads to higher interest rates and higher overall borrowing costs. Additionally, a reduction in interest rates can lead to refinancing opportunities of existing municipal securities that can lead to taxpayer savings for a California school or community college district.