By Karen Pierog
CHICAGO, April 9 (Reuters) – A decision by the Federal Reserve on Thursday to help states, counties and cities facing a cash crunch caused by a coronavirus helped boost the troubled US municipal bond market.
Market prices of $ 3.8 trillion, where states, cities, schools and other issuers sell debt, have climbed higher following the Fed announcement, said Greg Saulnier, Municipal Market Data (MMD) managing analyst. Yields fell 6 to 10 basis points on the MMD benchmark triple-A scale.
State and local taxes, particularly on personal income and sales, are expected to come down due to mass layoffs and lower consumer spending, as businesses and services are closed to curb the spread of the virus.
Earlier Thursday, the central bank announced that it would inject up to $ 500 billion into governments, which are at the forefront of the battle for health.
As part of this plan, the Fed will directly purchase municipal bonds of up to two years issued by states, as well as countries with more than 2 million people and cities with more than one million.
Gary Pollack, managing director of fixed income at Deutsche Bank Private Wealth Management in New York, said the Fed was a lifeline for governments.
“It will not solve all the problems for municipal governments, but it is something, and for the moment, something is better than nothing,” he said.
According to the decision of Tony Rodriguez, head of fixed income strategy at Nuveen, the Fed’s decision should prevent a wave of state and local government borrowing from flooding the already struggling market.
“It is very good to reduce some of the potential stress in the market for this massive offer,” he said.
Muni’s normally calm market was hit by huge price swings in the past few weeks amid a liquidity crunch that eased after the Fed took steps to strengthen the short-term secondary market .
IShares National Muni Bond ETF MUB rose 0.8% on Thursday.
“We believe that municipalities will aggressively exploit this program to meet their liquidity needs, but in the longer term, the challenges are quite pressing, as we expect state and local municipal tax revenues to reach 350 billion dollars or more, “Barclays wrote on Thursday. Weekly municipal report.
Rating agencies have assessed the financial impact of the virus on all market sectors and have taken action on ratings and prospects. Governments have started to adjust their revenue forecasts down, New York State, the country’s hotspot for the virus, indexing 2021 tax losses to $ 10 billion.
Saulnier said the Fed’s decision “could also help consolidate some credit problems if states and communities can meet their basic needs.”
The $ 2.3 trillion CARES federal law, aimed at mitigating negative economic impacts, has allocated $ 150 billion to cover spending on viruses at the national and local levels. This week, Democratic leaders in Congress have asked governments for an additional $ 150 billion.
BREEDINGVIEWS-The Fed’s bridges over the economic abyss miss a destination
(Report by Karen Pierog in Chicago Edition by Alden Bentley and Matthew Lewis)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.