Bond market update
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Municipal market commentary – week of Feb. 1, 2021

2020 was an interesting year in the market to say the least. March 2020 brought the onset of COVID-19 to the United States, which had a drastic effect on the bond market. There was an approximate 30-day period where new issue municipal bond deals were all put on hold; the market was caught in a wait-and-see situation. I cannot recall any other time when the municipal market paused for nearly a month. The Municipal Market Data (MMD), which is owned and managed by REFINITIV, is the rate index the municipal market uses, and we witnessed frequent swings in this index of up to 50 basis points (BP) daily during this market pause. The bond market had never experienced these types of daily moves, which was the main catalyst that caused the market go into a holding period. Interest rates decreased by roughly 100BP from March to April 2020, then in April, the market started issuing bonds again. Issuers took advantage of the low interest rate environment, and as such, 2020 produced a record year for issuance to the tune of $474.1 billion (the previous record was $448 billion in 2017). The election had little impact on the municipal market other than accelerating deals that priced before the election occurred, so issuance in October 2020 was considerably high and fortunately, demand for bonds remained high as well.

In summary, 2020 saw record bond issuance at historically low interest rates.

We have also entered 2021 with interest rates at a historic low. The number of deals we have seen so far is minimal, which is to be expected. Demand for bonds so far has been healthy, so we are off to a solid start for the year. We have seen 10-year bond deals closing with total interest costs at approximately 0.81% and 20-year structures with an approximate 1.55% interest rate.

Considerations for 2021

The market will be keeping its eye on the new Biden administration in Washington D.C. Most likely, some policy shifts will occur from the previous administration. As these changes take place, the market will need to digest and act accordingly. The Federal Open Market Committee (FOMC) is on record saying they expect their current discount rate to remain the same at least until 2023. We are not anticipating any news or movement from the FOMC this year, but as usual, the market will keep an eye on the notes released after committee meetings to see if they are starting to shift from their current stance. The major catalyst this year that will impact interest rates should be economic data, policy shifts in the White House and supply/demand, which is not unlike most other years, with the exception of the FOMC being on the sideline (at least for now). 

In summary, 2021 should provide another advantageous environment for issuing bonds. Interest rates are at historic lows, demand for municipal bonds is extremely healthy and despite the pandemic, the economy seems to be absorbing the changes rather well.

Good luck with all of your projects, and please connect with us if our Municipal Advisors and bond specialists can help you take advantage of this low interest rate environment.

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Tim Sutton
Director of Bond Pricing
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