CSAC Bulletin Article

Record Recovery Caps Crazy Month for Muni Bonds

March 26, 2020

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.

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