Pandemic Spurs Most Muni Bond Trading in a Decade

(Bloomberg) -- The pandemic spurred the municipal market to do what it almost never does: Trade.

Investors bought and sold more municipal bonds last Thursday, $29.8 billion, than they have since Nov. 19, 2010, when trading topped $38.9 billion. On Friday they did almost as much, $25.6 billion, well above the 2020 average of $13.7 billion.

Yields moved up, too. Municipal bonds maturing in 10 years began last week at 0.88%. They begin this week at 1.66%, an unprecedented move higher.

My more muni-centric friends offered all sorts of reasons about what happened. Investors were withdrawing money from mutual funds that specialize in high-yield municipals like airport and tobacco bonds and all sorts of crazy speculative projects, they said. Big money managers lost money on hedges. Algorithmic trading. Too-low yields. Hedge funds sold munis to take advantage of repriced equities.

If I had to guess, I’d say it was a combination of all of the above, but it really didn’t matter, because last week wasn’t really a municipal market story. Munis were collateral damage in the stock market rout sparked by coronavirus fears.

No, what happens next is a municipal market story, Now we get a chance to gauge what eight weeks or so of shutdown and its aftermath do to the economy. I suspect analytical prowess will be in demand as investors try to figure out which issuers might miss debt service and which projects might blow up entirely under the stress. It’s going to take a few months to work that out.

In the meantime, expect a lot more trading as funds are hit with more outflows and investors sell munis to pay their 2019 taxes and the usual all of the above reasons, which now also must include the pretty compelling value represented by munis at a time Treasury yields are microscopic. For the historically minded, the record for the 2000s was set on June 28, 2007, when trading reached $41.6 billion. Don’t be too surprised if the market flirts with that figure again.

(Joe Mysak is a municipal market columnist who writes for Bloomberg. His opinions do not necessarily reflect those of Bloomberg LP and its owner, and his observations are not intended as investment advice.)

To contact the reporter on this story: Joe Mysak in New York at jmysakjr@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, Larry Reibstein

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