Municipal Bonds: Assessing the Market after the Fed’s Move | Lord Abbett
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Fixed-Income Insights

Here’s a brief look at how the municipal bond market is responding in the wake of the dramatic policy actions on March 15.

[Register now for a March 19 market update webinar with Dan Solender and other members of the Lord Abbett municipal bond team.]

The moves by the U.S. Federal Reserve (Fed) on March 15 in response to the economic impact of the COVID 19 coronavirus, including a full-point cut in the benchmark fed funds rate and the launch of a $700 billion bond purchase program, have contributed to a continuation of the tough market for municipal bonds. Combined with the recent trend of fund outflows, as evidenced by Lipper data—particularly from the high yield municipal bond category—the market tone has become more risk-averse as everyone had to adapt to the new environment.

If the Fed thought these steps were necessary, then we believe there needs to be even more analysis of the economic impact of the virus. Clearly the impact depends upon the duration of the economic slowdown from the response—and we won’t know that for a while—but the market reacted, with some sectors moving down more than others. For example, bonds tied to the health of airlines and banks underperformed while, those linked to the water/sewer and utilities sectors did better. 

Overall the negative tone led many of the more liquid sectors to underperform on March 16, not because of underlying credit fundamentals, in our view, but just because they could provide easier sale candidates for funds seeking to raise cash. This caused any bonds traded to be marked down faster due to the liquidity premium being priced into valuations while less frequently traded bonds did not have that impact. 

In the immediate aftermath of the Fed’s dramatic move, the performance of the broader municipal bond market was negative, based on the benchmark Bloomberg Barclays Municipal Bond Index, but the market was functioning reasonably well as there was liquidity at adjusted prices. We believe overall credit quality likely will hold up sufficiently if actions being taken now, such as the Fed move and economic assistance legislation currently moving through Congress, shorten the duration of the severe economic reaction, but ongoing analysis will constantly be needed as the situation unfolds.

 

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