By: Howard Mackey
The week ending 3/13/20 was the most volatile week that the fixed income markets experienced since the 2008 financial crisis.
Initially the markets rallied in response to announcements regarding the spread of the coronavirus (COVID-19) world-wide, with the declaration by the World Health Organization that the virus has reached a pandemic stage. Global equity markets fell to levels erasing the eleven-year bull market.
During the week however, fixed income markets de-coupled from their historic relationship to equities and began to deteriorate. Hedge funds and other major market participants initiated arbitrage trades, borrowing Treasuries with maturities believed to be over-priced and selling them (short) into the market with the expectation that prices would drop (yields would increase). Simultaneously the same traders would buy other Treasury maturities believed to be under priced   expecting  an increase in value. Prices did not perform as expected, causing participants to attempt to close out (unwind) these trades, flooding the market and precipitating a liquidity crisis.  The lack of liquidity caused sharp increases in yields. Ten-year Treasury note yields began the week at a .54% (one-half of one percent) yield and rose 44 basis points to .98% by Friday.
On Wednesday, the Federal Reserve Bank introduced a stimulus plan pledging to inject $5 trillion into the banking system, via one to three-month repurchase operations (repos) in ten-$500 billion operations within the next month. The repos, designed to increase bank liquidity and stabilize the Treasury market, was also thought to bolster the equity markets. On Friday, the U.S. stock markets rebounded, but Treasuries further deteriorated. On Sunday, the Federal Reserve announced additional steps including lowering the rate charged to banks for short-term emergency loans from its discount window from 1.75% to 0.25%
The municipal bond market also deteriorated during the week when the ten-year AAA Municipal Market Data index (MMD) rose from .73% on Monday March 9th to 1.61% on Friday, an 88- basis point increase. Tax-exempt municipal bond funds received continuous inflows of cash for 56 straight weeks. For the week ending February 28th, inflows were $2.3 billion. Starting the week ending March 6th, funds started experiencing redemption's. For the weekly period ending March 11th, redemption's exceeded $1.74 billion.
Additionally, the municipal markets suffered severe liquidity as trader had few bidders interested in adding to their bond positions. Those that had capacity extracted substantial yield premiums from willing sellers. Several negotiated primary issues scheduled to be priced this past week were postponed or sold at very high yields. One-year tax-exempt notes in New Jersey traded two weeks ago at levels of .98% to 1.08%. This week, similar New Jersey notes traded at levels as high as 1.45%. On Wednesday, In the secondary market, AAA high-grade bonds such Maryland and Virginia general obligation issues, which normally trade at a yield of about 5 basis points above the MMD scale, traded at spreads ranging from 39 to 52 basis points over the benchmark. However, with the large increases in the MMD index on Thursday, AAA spreads over the MMD have reverted to normal levels. AA and single A spreads however have not recovered.
While municipal bond rates have increased significantly this past week, rates are still very low when viewed historically. As mentioned, the ten-year MMD yield was 1.61%on Friday. Last year on March 13, 2019, the ten-year yield was 2.05%.
Weekly Market Update
Attached please find NW Capital's Weekly Analytical Review of the Municipal Bond and Fixed Income Markets measured over a 20-day period.
Following is an economic update, a forward calendar of upcoming New Jersey transactions, and highlights of New Jersey issues priced last week.
We hope that you find this information useful. 
Click the link   Weekly Review 

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