Most people will agree there has been nothing “usual” about the last three months. That said, the bond market does currently appear to be operating as close to “normal” as we’ve seen since the COVID-19 pandemic started.
Let’s look at the Municipal Market Data (MMD) index – the bond index by Thomson Reuters that the municipal market uses to price bonds – and what it has done since March 9, 2020.
March 9, 2020
1yr MMD = 0.44%
10yr MMD = 0.78%
20yr MMD = 1.19%
May 12, 2020
1yr MMD = 0.58%
10yr MMD = 1.13%
20yr MMD = 1.73%
As evidenced above, we are now dealing with higher rates than in March. At that time, we were seeing one-day swings of 50-60 base points within the MMD, and new issue deals were struggling to get done. Today’s rates, although higher than in March, are still at historically low rates, and most deals are getting priced.
An important underlying issue that the pandemic has created for the municipal market is the issuer’s credit quality. Issuers, as well as almost everyone involved in this market, are trying to better understand what their revenues (tax collections) will be. The general consensus is these revenues will be decreased, but the great unknown is by how much and what the impact will be on each issuer.
Bond buyers like to have confidence that the bonds they are buying will be able to pay principal and interest. Credit quality has always been important, but right now issuers’ credit quality is being intensely scrutinized. Bond issuers that have a riskier credit profile (more difficult, bad credit, story bonds, etc.) will need to have some patience. Although deals may still get done, it may take longer than usual for buyers who have greater risk tolerance.
How should issuers play the current market? The most important thing is to remain flexible. Flexibility will allow you to step back during a market period where you need to step back.
Other considerations include:
Bond buyers understand there will be bumps in the road. Having a solid plan in place could be the difference between buyers purchasing or passing on your bonds.
For more information on this topic, or to learn how Baker Tilly public sector specialists can help, contact our team.