Municipal Market Volatility and Liquidity Amid COVID-19 (March 12, 2020)

Dexter Torres and Kenneth Potts
Dexter Torres and Kenneth Potts

There is considerably less liquidity in the municipal bond market today. Municipal/Treasury ratios are above 200%. As we assess the scope of the panicselling due to COVID-19 concerns, some of our initial observations are included below:

  • Most dealers are currently not bidding on municipals. The market volatility has left them unable to hedge their positions. Their risk departments are tapping them on the shoulder to sell positions and lighten up.
  • We hear that other buy side managers are frozen. Absolute yields and market volatility have put them on the sidelines. “Deer in the headlights” has been used by some of our trading partners.
  • There are multiple large bid lists but very few items appear to be trading. Fund flows were a bit negative last week, and from the bid lists we are seeing from others such as large mutual fund complexes we believe they are experiencing redemptions. They are selling some of their higher quality names. This is reminiscent of other times when there were large redemptions and the funds tried to sell their most liquid, high quality names in an effort to raise cash and not take the hit as all credit spreads widened. We have seen large blocks of high-quality names such as Delaware GO and Maryland GO out for the bid.
  • Although the fund flows we track from Lipper don’t publish daily flows, one other reporting service (EPFR) is showing about $1.3bn in outflows the past 2 days.

As always, we will do our best to provide liquidity as needed. However, we would recommend holding off on selling municipals if liquidity is not needed at the moment. We also believe this is an opportunity to buy municipals, given the significant cheapening.