Volatility

Municipal benchmark yields were lowered by 60 to 80 basis points across the curve. Some trades pointed to nearly a 1% bump on short-term paper while state and local governments grapple with downgrades and revenue shortfalls.

The Fed today added in variable rate demand notes to other short-term municipal debt to a list of assets eligible to be used as collateral by financial institutions, which contributed to some stability in the secondary market.

A big New York State Empire Development Corp. private placement is likely to be followed by more until the municipal primary starts functioning again.

We are desperately trying to establish the bottom at present to provide a modicum of confidence that investors may stop raising cash and would be more inclined to put the cash horde back to work in the market.

Lipper reported a whopping $12.2 billion of outflows from municipal bond funds. Out of that huge number, $5.3 billion were from high-yield funds. The $12 billion figure of outflows in one week equates to about 3% of annual municipal volume.

Benchmarks showed again that the short end was being hit hardest — 30 basis points up on the one-year and at least 10 up on the long end, but the entire curve was being cut drastically. The primary market was again at a standstill.

The municipal market is dealing with a major liquidity event, with massive short-end selling.

Uncertainty still abounds for the public finance space, as just before the market close, President Trump declared a national emergency. Meanwhile, states and cities across the country are closing schools, sporting events, and cutting back public transit. But Friday, at least, provided some reprieve from the five previous volatile days.

In the best of times, pricing municipal bonds is not so simple. In times of volatility, the challenge is magnified.

Ben Barber at Goldman Sachs Asset Management seeks opportunities for SMA and mutual fund investors with a wide range of goals.