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Muni Market Stages New Sell-Off on McConnell, Supply Wave

Muni Market Stages New Sell-Off on McConnell, Supply Wave

(Bloomberg) -- The $3.9 trillion municipal-bond market is locked in a slow-motion sell-off amid concerns about the financial damage the economic slowdown is inflicting on states and cities.

The securities have struggled to recover from a historic rout in March as buyers fled at the fastest pace on record, causing prices to tumble by the most in at least four decades. While the bonds rebounded after the Federal Reserve intervened in the market, investors are still concerned about the growing toll the slowdown is taking on the tax revenue of governments nationwide.

It didn’t help that Senator Mitch McConnell last week said he would be open to states pursuing bankruptcy in lieu of Congress providing more federal aid to cover their deficits. While investment firms and officials like New York Governor Andrew Cuomo were quick to condemn his comments, it may have shaken the confidence of retail investors who dominate the municipal market by raising the specter that Washington will leave them to fend on their own.

For the muni market, there’s been “negative news on top of negative news,” which along with the increase in supply has weighed on performance, said Kathleen McNamara, a strategist for UBS.

Some governments have started trying to revive new bond deals that were put on hold, pressuring the market further. Benchmark municipal-bond prices fell Tuesday, sending top-rated 10-year yields up 7 basis points to 1.36%, while 30-year yields climbed 10 basis points to 2.24%. Prices of the debt have dropped for nine and 10 straight sessions, respectively.

The performance of the municipal-bond market has taken on renewed importance as states and cities on the front lines of the pandemic are likely to tap investors to help cover budget shortfalls left by the steep economic slowdown. The Federal Reserve, which is planning to extend as much as $500 billion of short-term loans directly to states and local governments, said on Monday that it’s watching to see if further intervention is needed.

UBS’s McNamara said the Fed’s announcement on Monday afternoon was welcome good news. “The timing is good,” she said. “I was starting to get worried about munis again.”

Muni Market Stages New Sell-Off on McConnell, Supply Wave

Some of the pressure stems from the rebound in supply. Issuers are expected to sell $7 billion in bonds this week, which is in line with normal conditions, Citigroup Inc. strategists led by Vikram Rai said in a report on Monday. Supply had dwindled to just over $700 million during one week in March, when billions of dollars of bond deals were scuttled as prices tumbled, according to data compiled by Bloomberg.

On Tuesday, Illinois said it planned to issue $2.2 billion of bonds next month, including $1.2 billion of short-term general-obligation notes to get through the Covid-19 crisis and delayed tax receipts. The state is planning to sell another $1 billion of long-term debt in May to help fund its pension buyout program and capital projects.

New York’s Metropolitan Transportation Authority is moving an $672 million bond sale that would help pay down short-term debt to the week of May 4, according to people familiar with the matter.

While demand bumped up after an economic stimulus measure enacted by Congress allowed for the Fed to intervene in the market, that rally has since waned. Part of that may be driven by retail investors’ concerns with McConnell’s bankruptcy comments, as well as a slew of announcements on state and city budget shortfalls driven by shutdowns in activity nationwide.

Ramirez & Co. said in a report that the market was “enveloped” in concerns around the virus, which has led buyers to hold off.

Municipal-bond funds saw an estimated $317 million pulled on Friday, two days after McConnell’s bankruptcy comments and the largest daily withdrawal since April 7, before the Federal Reserve launched its municipal lending program, according to daily data compiled by EPFR Global. BlackRock Inc.’s iShares National Muni Bond ETF, a widely-watched gauge of investor sentiment, has seen five straight days of outflows.

The outflows from muni funds differ from other asset classes that the Fed has waded into, like investment-grade corporate bonds, said Cameron Brandt, director of research at EPFR.

McConnell’s comments around bankruptcy “injected a note of caution into things,” he said.

©2020 Bloomberg L.P.