Last week’s news was all bad for the municipal bond market, but
actions by both the Federal Reserve and Congress have restored
normalcy, at least for now.
Bonds sold by counties, states, schools, and other public
agencies are generally considered to be among the safest
investments, which, combined with their tax-exempt status, allows
those agencies to borrow for very low rates. That relative safety
led to investors to increase their municipal bond holdings in
February. But the uncertainty over the last couple weeks
regarding the coronavirus impact on the economy at large and
state and local governments specifically led to a massive selloff
of municipal bonds as investors sought liquidity.
The effect in the short-term was to send borrowing rates for
public agencies through the roof, far beyond what occurred even
in 2008, causing problems for those agencies using variable rate
debt for short-term funding operations and for those about to go
to market with any kind of bond issue.
However, the Federal Reserve worked to shore up the short-term
variable rate market and the Congressional deal on a $2 trillion
emergency aid package reportedly includes provisions allowing the
Fed to do the same for longer-term notes. These actions have led
to an almost immediate return to normalcy. Only time will tell
whether this renewed normalcy becomes renewed stability.
