Fed Expands Emergency Program to Include Muni Funds After Rout
Fed Expands Emergency Program to Include Muni Funds After Rout
(Bloomberg) -- The Federal Reserve said Friday it had expanded its emergency program to provide liquidity to money market mutual funds, allowing the purchase of assets from single-state and other tax-exempt municipal money market funds.
Shares of BlackRock Inc.’s iShares National Muni Bond ETF, the biggest municipal-bond exchange-traded fund, traded higher after the announcement.
“Thank you to @federalreserve,” U.S. Treasury Secretary Steven Mnuchin said in a tweet. “Today I approved the expansion of the Money Market Mutual Fund Liquidity Facility to include municipal securities. This will create additional liquidity to support the states and municipalities!”
The move followed the Fed’s Wednesday night announcement that it had created a Money Market Mutual Fund Liquidity Facility aimed at relieving pressure from prime money market funds that were seeing large institutional-customer withdrawals. The Treasury Department will provide $10 billion of credit protection.
Money market funds provide credit to everything from banks through repurchase agreements to corporations through purchases of commercial paper. They are a critical link the chain of short-term finance where companies borrow and lend outside the formal banking system.
“Fed purchase of municipal bonds is unprecedented,” said Mark Zandi, chief economist for Moody’s Analytics. “They didn’t go that far in the financial crisis. It illustrates the severe stress on credit markets, and how aggressive and creative the Fed needs to be to keep credit flowing.”
Risk Free Loans
The program, administered by the Boston Fed, will provide risk-free loans to banks that will purchase a range of assets from prime, and now municipal, money market funds, with the assets deposited with the Fed as collateral. By expanding the program to include short-term municipal bonds, it may ease the difficulty cities and states are having in raising funds.
The program, however, has its limits. Fed officials see the universe of eligible municipal assets at around $40 billion. Money funds generally cannot purchase securities that are further than 13 months from maturity.
The move by the Fed is a “welcomed starting point to offer the municipal market some relief from the liquidity logjam,” said Gabriel Diederich, a portfolio manager at Wells Fargo Asset Management.
Yields on short-dated municipal bonds, which are among the easiest to sell, have ricocheted upwards, climbing to 2.84% from 0.47% on March 9, according to Bloomberg BVAL pricing scales as of 1:00 p.m. New York time.
Others were even more upbeat.
”It’s a major help to high-grade municipals, where liquidity pressures have concentrated on money market funds,” said Matt Fabian, a partner at Municipal Market Analytics, an independent research firm. “The program gives the funds an ability to afford investor redemptions without creating additional pressure on the underlying assets. Of course, liquidity is an issue all along the curve, but giving the front a boost is better than nothing.”
May Be Expanded
Officials at the central bank indicated eligible securities could eventually be expanded to include variable-rate municipal bonds.
The global health crisis has hammered municipal bonds as states and localities strain resources to prepare a medical response, help local businesses and suffer tax revenue losses as they ask people to stay at home.
Read more: Mass Exodus From Muni Bonds Prods Fed to Step in to End Tailspin
Municipal bonds were headed for an 8% drop in March, their worst month of performance since 1981, according to Bloomberg Barclays indexes.
Prime funds are those money funds eligible to invest in debt not backed by the U.S. government.
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