Written by: Jordan Mixsell
A combination of technical support and Federal Reserve induced confidence has helped municipal bonds power back from the downside price volatility we saw in March during the height of the Covid-19 crisis.
In fact, the municipal bond market saw its biggest rally since 2009 during the month of May, outperforming both corporate bonds and US Treasurys. Fueled by a reversal of mutual fund outflows and intervention by the Federal Reserve, the Bloomberg Barclays Municipal Bond Index (LMBITR) returned 3.18% during the month. The Bloomberg Barclays Muni High Yield Index (LMHYTR) was up 4.08%.
According to Lipper, combined weekly and monthly fund inflows were $2.2 billion for the period ending June 3rd, decreasing YTD outflows to $16.6 billion. This marked the 3rd straight week of inflows, and the largest since March 4th when investors added $2.8 billion to mutual funds.
In addition to technical support, the municipal market has received a boost from the Federal Reserve’s Municipal Liquidity Facility Program (MLF). Backed by funds from the U.S. Treasury, the facility aims to mitigate the economic impact of the Coronavirus pandemic, and has successfully restored investor confidence in the municipal market. The U.S. Central Bank announced last week that it is expanding the $500 billion emergency lending program for state and local governments to include smaller municipalities. Originally open to state issuers, the District of Columbia, cities with at least 250,000 residents and counties with populations of at least 500,000, states can now designate up to two cities or counties to directly issue notes, regardless of population. Removing this restriction now allows every state to have at least one city and county (two combined) participate in the MLF. In addition, all 50 state governors may now select two revenue bond issuers, such as those that issue bonds backed by sales taxes and income taxes, to participate directly in the program. On Tuesday, Illinois became the first borrower to tap the facility, announcing a one-year, $1.2 billion loan at a 3.82% interest rate. The country’s most indebted state said it would issue the notes to cover shortfalls related to an extension of this year’s deadline for filing income tax returns.
Our expectation is for the market to remain steady in the weeks ahead as investors balance the need for tax-free income with the harsh economic reality many municipalities are facing. As such, we would characterize this as a “bond pickers market,” where the opportunity to add value exists, but must be carefully done via stringent credit analysis.
Sources: Bloomberg as of 6/4/2020