During this period of uncertainty, Ehlers is committed to keeping our readers up to date by providing as much relevant information as possible via our Market Commentary. Similar to last week, this update covers broader economic signals and municipal market trends as they continue to develop.
The stock market continues to show signs of stability that has been missing since late February. For example, the S&P 500 hit a low of 2,237.40 on March 23rd and has since climbed over 23% or about half of its decline from recent highs. Stock indices still exhibit some volatility on a daily basis, but the magnitude of price swings has abated to some extent. The Chicago Board Options Exchange Volatility Index (VIX) has returned to the sub-40 levels not seen since February 27th, reflecting a modicum of calm on the part of investors.
The broader economic discussion continues to center around ongoing federal, state and local government responses to COVID-19. Currently, 42 states have implemented statewide “Stay at Home” orders, which have greatly reduced economic activity. However, as the federal government continues to implement its stimulus programs, the focus may be shifting toward a return to normal, all of which is encouraging for markets. In fact, several governors have put out preliminary frameworks to resume “normal” economic activity.
Even so, we are by no means out of the woods yet. The National League of Cities posted results of a survey revealing that at least 2,100 municipalities will be laying off employees and cutting expenses in response to delayed or lower revenues, including lower sales tax receipts, tourism related revenues, and delayed income taxes (because of the payment deadline shift from April 15th to July 15th).
Municipal Market Trends
In the holiday-shortened week of April 6 through April 9, the benchmark 10-year AAA MMD yield declined from 1.48% to 1.20%. That trend continued into early this week, with yields shedding another 11-14 basis points across MMD’s AAA curve. The 10-year AAA MMD yield ended Tuesday at 1.07% and the 30-year AAA MMD dropped to 1.90% from 2.01% last week (The Bond Buyer). The Bond Buyer reports municipal yields are currently highly negatively correlated with stock indices (meaning stock prices and bond yields are moving in the opposite directions), and that yields could surge again if equities re-test the March lows with any new developments.
Bloomberg reports that between March 9th and April 13th $15 billion of new municipal bond issues were sold, a 56% decrease over the same period last year. Many large dollar issues have been placed into day-to-day status over the past few weeks as issuers take time to assess the market. Underwriting desks plan to price up to 200 new negotiated issues this week – double the activity from last week – another sign the muni market is stabilizing.
As detailed in our last Commentary, the Federal Reserve has rolled out its Municipal Liquidity Facility (MLF) to purchase short-term municipal obligations, with the intent of providing liquidity to governmental entities experiencing cash flow problems as a result of the COVID-19 pandemic. Last Thursday, the Federal Reserve announced some details of this program:
- The Fed will purchase up to $500 billion of short-term notes through a Special Purpose Vehicle.
- The maximum maturity will be 24 months, and the program is scheduled to end in September of 2020.
- Eligible borrowers include all states, counties with populations of at least 2 million, and cities with populations of at least 1 million (and the District of Columbia). Individual borrowers can use the borrowed proceeds to support underlying jurisdictions in a similar fashion but would not otherwise qualify under the program requirements.
It is possible this program will be useful for some of our clients to address cash flow issues, but we will need to wait to see more details of how (and if) respective states implement the program.
We continue to evaluate all options for our clients to access capital. Shifts in appetite and pricing are changing from week-to-week, given the uncertainty across many spectrums. Many municipal entities are contemplating construction projects as we enter spring, which includes reviewing bids on projects. Our recommendation is to engage your finance team at the earliest possible time to so as to afford your administration and governing body sufficient time to review options and contemplate debt structure alternatives, if necessary.
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