Munis Extend Rally After Deep Selloff
Bloomberg – Municipal-bond prices rose in early trading, extending the biggest one-day rally in more than eleven years, as Congress and the White House struck a deal on a more than $2 trillion stimulus package to soften the impact of the economic slowdown triggered by the coronavirus.
The gains were steepest for the shortest-dated securities, which were hardest hit by the steep sell-off this month as fund managers dumped the easiest-to-unload bonds to raise cash when investors pulled money out of the market. Three-month benchmark yields dropped 20 basis points to 2.35% while those on 10-year bonds fell 13 basis points to 2.54%. Those on the longest dated securities fell 6 basis points to 3.11%.
The rally comes after the White House and the Senate reached an agreement on a massive package of spending and tax breaks in a bid to prevent the swift shutdown of much of America’s economy from leading to a deep, prolonged recession. It includes about $500 billion that can be used to back loans and assistance to companies, as well as state and local governments.
Optimism about the package helped end a two-week rout in the municipal-bond market that resulted in the steepest losses in at least four decades. On Tuesday, as the deal neared, state and local bonds rallied the most since late 2008.
“The stimulus will be very helpful to the overall market,” said James Iselin, a portfolio manager at Neuberger Berman Group. He said on Tuesday the market had “really good two-way flow” and “direct buyers have become much more engaged, which is good to see.”
“The stimulus will inspire confidence that a bridge is being built to help get us to the other side as we continue to deal with challenges resulting from this unprecedented moment,” he said.
The two-day rally broke what had been an escalating sell-off in the $3.9 trillion municipal market as investors pulled cash out of mutual funds at a record-setting pace on concerns about how the economic fallout of the pandemic would affect cities, airports, hospitals and others that have issued tax-exempt bonds. The retreat saddled many borrowers with skyrocketing interest bills on floating-rate debt and effectively shut down the market for new debt issues as Wall Street banks put offerings on hold.
The Federal Reserve softened the liquidity strains by extending its lending programs to include some of the shortest-dated municipal securities.
The municipal market has been whipsawed by unprecedented volatility this month, so it’s not clear yet whether the rally is a temporary pause or the start of a turnaround. But there are some signs that investors are swooping in to scoop up some of the securities most affected by the sell-off.
On Wednesday, some of the most actively traded securities were floating-rate bonds issued by New York’s water system, whose yields surged to 6.75% during the rout. Puerto Rico’s sales-tax backed debt — which is a bellwether of the high-yield market that was dealt the steepest losses this month — were also among the most heavily traded, with the price of those due in 2058 rising to an average of 87 cents on the dollar from about 80 cents Monday.