Municipal Market Volatility and Liquidity Amid
COVID-19 (March 16, 2020)
ven the continued market volatility, we want to make sure we continue providing clients with regular updates on the state of the municipal bond market. After talking to some other market participants, we wanted to put into context the current market environment and liquidity in comparison with the financial crisis in 2008. Some observations included below:
Mid-week last week there was virtually no liquidity. But as we’ve had the drastic rate moves, (municipal bond yields are higher by 75bps in the last few trading days), we have seen “some” buyers come in. There has been a mixed response from the dealers – some say that liquidity is better than during the financial crisis, and some say it has been worse.
The main difference between the illiquidity now and during the financial crisis, is that in 2008, the banks really did not know if they were going to survive and open their doors the next day. Back then the big question was “will the financial system fully collapse?”. That does not seem to be the issue today. Right now, the big fear is that COVID-19 will continue to spread and cause a severe pullback in economic activity to the point of a deep recession. We are hearing that the stability of the banks and the financial system is not currently the issue. It appears the dealer desks are in a holding pattern and lightening up on their inventory, and banks themselves are actual buyers and the crossover buyer is back in play as municipal- treasury ratios have cheapened dramatically.
Municipal bond buyers have popped up at adjusted cheaper levels. There is talk of more individual account investment managers returning to buying, and nontraditional buyers coming into the sector to take advantage of these higher rates and ratios.
Still, liquidity is poor. Fund flows will most likely show large outflows, (by one measure there was approx. $3.4bn in outflows on Friday alone). Ratios across the curve are north of 200%, with some trades in the front end occurring at even cheaper ratios.
We believe this may prove to be another good buying opportunity for those that can handle the volatility. And as always, we will continue providing market color in these turbulent times.
Senior Vice President, Portfolio Manager
Senior Vice President and Portfolio Manager, Head of Trading