COVID-19 low interest rates

We find ourselves about one third of the way through 2021 and while we have rebounded from the historically low interest rates we saw in 2020, we are still trading at very low interest rates and seeing demand outpace supply for municipal products.

The taxable market has outpaced the tax exempt market in terms of rising interest rates so far this year.  Here is a look at the movement in rates.

Treasury yields:

January and April 2021 Treasury yields

Municipal yields:

(Source: Municipal Market Data (MMD), rate index owned and managed by REFINITIV)

January and April 2021 MMD yields

When COVID-19 was declared a national emergency in March 2020, interest rates fell like a rock. We saw yields decrease by about 100bp due to all the uncertainty associated with the pandemic. Fast forward to the beginning of 2021, post-election and vaccine rollout, the economy has started to improve. This was the catalyst for interest rates to start heading higher, closer to pre-COVID-19 rates. 

Mainly looking at the economic data available as well as guidance being signaled by the Federal Open Market Committee (FOMC), interest rate movements appear to be trading at more historical norms now. Guidance from the FOMC has been relatively dovish in that they favor low interest rates and are not planning on raising rates. They have indicated that they will hold their rate steady and envision potentially changing their stance in 2023, even with a few members of the Federal Reserve Board of Governors in favor of increasing rates sooner.

What does the rest of 2021 look like?

The general consensus is for interest rates to continue to climb. It is unlikely we will see the extreme volatility in rate movements that we saw in April 2020 when rates were moving 20-50bp daily. Rate increases are expected to be more orderly this year. We may encounter some continuous cycles over 30 to 50 days where rates move higher (15-20bp), then retreat (6-10bp). Are there potential catalysts that could accelerate and cause rates to move drastically in either direction? The short answer is yes, but, the probabilities are low. If the economy is stimulated enough, the FOMC could step in and raise rates, but considering what we went through in 2020, and to an extent are still experiencing with COVID-19, FOMC intervention is unlikely.

The 2018 tax plan eliminated the ability for issuers to advance refund tax-exempt deals on a tax exempt basis. Issuers can do this on a taxable basis and many have been doing just that. With the rise in rates on taxable bonds so far this year, we are starting to see some of these refundings just don’t work anymore. The good news: there has been chatter coming out of Washington D.C. this year in which the federal government may pass a bill (before the end of 2021) that will allow issuers to once again do advanced refundings on a tax exempt basis.


We are still in a very favorable market for bond issuers. Interest rates are still extremely low compared to historic rates. Recently, we have seen 10-year level debt structures come in with total overall borrowing costs of 1.22% and a 20-year structure come in at 1.82%. Demand is outpacing supply, which helps keep interest rates low.

For more information, or to learn how Baker Tilly’s public sector specialists can help your organization take advantage of this low interest rate environment, contact our team.

Tim Sutton
Director of Bond Pricing
man working on laptop
Next up

Restaurant Revitalization Fund applications open May 3