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Volatility has been the name of the game in the municipal bond market over the last few weeks.  Uncertainty created by the COVID-19 pandemic spurred some municipal bond investors to move their holdings to the relative safety of cash.  These redemptions resulted in municipal bond supply outstripping demand.  As a result, interest rates moved higher and higher as sellers sought to motivate reluctant buyers.  Secondary market activity became detached from the primary (new issues) market.  All eyes were on the secondary market which caused the primary market to, essentially, shut down. 

Beginning the week of March 23rd, the Federal Reserve Bank announced its intention to begin buying municipal bonds in order to provide the much-needed liquidity the market was seeking.  The third stimulus bill was also gaining legs at that time. All markets cheered this news and the tone of the municipal bond market greatly improved.  Secondary market bond sales slowed to a manageable pace leaving market participants feeling that the new issue market was getting the engine primed to start operating somewhat efficiently again.

The graph below illustrates the wild ride the market traveled over the past few weeks.  During this time period, one of the most tracked municipal bond indices, the AAA Municipal Market Data 20-Bond Index, swung an unprecedented approximately 2.0% up and 1.5% down.

The Municipal Bond Market is not out of the proverbial “woods” just yet.  There are still concerns about the short- and long-term effects of COVID-19 on the economy.  Additional municipal bond market volatility is a distinct possibility.  Any local government anticipating an issuance should think through how the unique characteristics of the transaction intersect with this unique market environment in order to formulate the optimal approach.  Your municipal advisor can help in this regard.  What should be stressed, however, as deals start getting done again - and they will – is that municipal bond interest rates remain at or near historical lows making this an optimal time to finance the essential business of local government.  For those looking for ways to bolster liquidity, anticipatory and capital project reimbursement borrowing can be a potential tool in your toolbox.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

Tim Sutton
Managing Director
Tom L. Kaleko
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