Coronavirus Upends Muni Market

Sentiment quickly and substantially shifted for Munis as the asset class continues to under-perform the price movements in the U.S. Treasury bond market, and thus becoming very cheap. Further volatility is likely as price discovery becomes more elusive. We have seen a degree of forced selling and for a number of fund complexes seeking to raise liquidity, higher quality credits tend to be the first items put out for the bid. We posit that the huge back up in rates over a very short time period and the potential for further rate volatility can provide reasonable investment opportunities for the discerning muni bond buyer. We have also indicated that any sustained disruption in fund flows would only add to the stockpile of sidelined cash.

Throughout the foreseeable future, sectors of the public finance world will likely be subject to reassessment as the economic lock-down is sure to have a budgetary and revenue impact of consequential significance for some more than others. For now, the muni market is seeing quality credits and structure types that have not been available just a few weeks ago. With the outsized demand that had characterized the muni market for much of last year and for the first two months of 2020, professional buyers found it difficult to find the credits and structures that most suitably met their needs and so many had to settle somewhat just to put their cash to work. Now we are seeing heavy bid list activity, again a reversal of what we were seeing just weeks ago, and so buyers can better pick and choose bonds with a more discerning eye and have credit and structure be the primary investment determinants. For now, we expect to see a liquidity premium for certain credits and structures and price discovery will remain challenged.

Munis are now being kept out of the haven trade, and will likely remain on the sidelines until the coronavirus curve shows material flattening and we begin to have a better handle on the downside risk exposure for credit given the tightening restrictions over human movement and social interaction, and a broadening suspension of economic activity. We further want to see better information on testing, therapeutics/clinical trials and vaccine development. We welcome the President’s declaration of a national emergency which frees up higher funding levels for the states. Past emergencies have shown the value of Community Development Block Grants facilitated through the U.S. Department of Housing and Urban Development which can offer meaningful assistance to local businesses and help keep them economically viable. The Trump administration and Congress are actively discussing the deployment of direct cash payments, grants and loans to the airline and travel and leisure industries.

We suspect that with the building concern over credit, certain issuers may choose to postpone or even cancel their deals, particularly if they are not of a critical nature. We also think that issuer capital plans are being reviewed against the backdrop of heightened economic and credit uncertainty. We should also prepare for a possible backlog in issuance should the economy begin to come back on line sooner than expected with credit not materially impacted.

For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Advisor.