Municipal Finance Caucus urges Fed to expand muni purchases
Members of the House Municipal Finance Caucus are urging the Federal Reserve to purchase municipal bonds with terms of up to 30 years, both directly from issuers and on the secondary market.
“This is a segment of the market that should not be ignored,” said a letter signed by 43 House lawmakers. “These efforts should also be extended to meet the needs of rural, suburban, and urban communities.”
The May 1 letter to Federal Reserve Chairman Jerome Powell and Treasury Secretary Steve Mnuchin was publicly released Monday.
Municipal Finance Caucus co-chairs Reps. Dutch Ruppersberger, D-Md., and Steve Stivers, R-Ohio, initiated the letter to urge Powell and Mnuchin “to follow through on Congress’ legislative intent and recommend providing at least an additional $35 billion of these CARES Act funds to support the municipal secondary market.”
The congressional letter emphasizes that Congress wants the Fed to expand its support for the municipal bond market beyond the scope of the Municipal Liquidity Facility which focuses on new note issuances.
Medium and long-term municipal securities represent over 95% of municipal bonds, Ruppersberger and Stivers said in a press statement.
“Many state and local governments are going to be in dire straits as they face unprecedented revenue shortfalls, extended timelines for income tax filing and unforeseen expenses related to COVID-19,” Ruppersberger said. “At the same time, they have to keep police, firefighters and teachers on the payroll, maintain roads and provide other critical services. I am proud to lead this bipartisan effort to encourage the Fed to also help our state and local governments weather this storm."
The Federal Reserve announced on April 9 the creation of a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities while the Treasury will provide $35 billion of credit protection using the funds appropriated by the CARES Act.
On April 27 the Fed announced revisions that expanded the eligibility by lowering the population thresholds to include counties with at least 500,000 residents and cities with a population of above 250,000.
The Municipal Liquidity Facility, which has not yet begun, is expected to help states, counties and municipalities manage their cash flow through the purchase of tax anticipation and revenue anticipation securities with securities with a duration of up to three years.
Issuers are eligible only if they had an investment grade rating as of April 8 from at least two major nationally recognized statistical rating organizations.
Michael Decker of the Bond Dealers of America said his organization is supportive of giving the Fed the ability to intervene in the secondary market, but the immediate need is for liquidity financing through the Municipal Liquidity Facility.
“From the BDA’s perspective, we feel like the Fed is in a good place,” said Decker. “We feel like the Fed has taken appropriate actions. We are really looking forward to seeing the Municipal Liquidity Facility, the primary note purchase facility up and running.”
As for the secondary market and long-term issuances that were referred to in the congressional letter, Decker said the secondary market has recovered somewhat from “those worst days” in March.
“It’s not behaving normally but trades are getting done and it’s not clear the Fed needs to intervene in the secondary market at this point,” Decker said. “I think the Fed should be ready to use this authority if market conditions deteriorate. We’re certainly supportive of the Fed having the authority to intervene in the secondary market if needed.”