State of the Municipal Bond Market
Jun 4, 2020 | Viewpoints
Financial markets have suffered tremendous volatility in the wake of the COVID-19 pandemic, and the $3.9 trillion municipal market is no exception. After a strong 2019 and healthy January and February 2020, the municipal market suffered investor panic in March with the dramatic impact of the coronavirus and widespread lockdowns. Credit spreads widened as investors sold off high quality assets to raise liquidity. The municipal market is much smaller and typically less liquid than taxable bond markets; as such, this lack of liquidity was exacerbated by volatile market conditions. Nevertheless, the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Federal Reserve stimulus programs have helped the municipal market return to some semblance of normalcy. Municipalities are suffering significant revenue shortfalls as economic growth falters and the economy has come to a standstill during the stay at home order. The risk of downgrades has increased, but the sector has been historically safe and resilient, and defaults have been extremely rare. Most state statutes and public entity investment policies permit the purchase of municipal securities, and the asset class provides an opportunity to diversify portfolios. However, investors must proceed cautiously, and credit analysis is more critical than ever.