To our friends, clients and colleagues, hope you are securely isolated and well, we thought it might be useful to provide a review of where we are and how we got here.
The Viral Economy
Prior to March 1, 2020, both the stock and bond markets were on a roll and then suddenly, and seemingly all at once, the markets woke up to the potential impact of the corona virus hitting hard in the US and here is what happened:
- The Dow dropped from an all time high of 29,550 to 18,500, a 37% decrease
- AAA 20-year Municipal bond yields increase from 1.33% to 3.18%, a 2.39% increase
- At each drop in both the bond and stock markets selling accelerated as fear increased
- Increased selling from mutual funds (due to high volumes of redemptions and unwinds of hedges) to a basically empty lot of buyers drove rates up to find a price where bonds would trade so they could pay for the $12 billion of redemptions from share holders
- Municipal new issuance has ground to a halt with over 150 issues posted for sale last week and only 6 actually achieving execution
- Tax exempt municipal bonds, which typically trade at a yield lower than US treasuries are now being priced at 217% of the 30-year US Treasury bond yield
- Most US economists don’t expect market stabilization till the 4th quarter of 2020 at the earliest
- The NJ note market has failed and or postponed offerings and those that did get bids saw yields offered as high as 4.49% for a one year note for an AA credit
All of this reveal the low liquidity of municipal bonds in a crisis environment and is the same thing that happened in the 2008 Great Recession after Lehman Brothers failed. As in 2008 this crisis has wiped out trillions of dollars of wealth in the investment community which will result in a new crisis for already stressed governmental pension funds.
What Can We Do?
As the initial wave begins to end there will be opportunities to get business done but at much higher interest rates that will likely eliminate refundings that had been planned. In reality, the capital available to the municipal market has shrunk by and estimated 30%. Given the wide-spread view of a long time to recovery, issuers should weigh accepting higher current market rates against postponement of capital projects and likely higher construction bids down the road. For those with notes maturing, it is likely that you will get better yields by a carefully handled negotiated sale rather than a competitive bid. Also realize that not having an offering document for a note sale just gives investors another reason to ask for more yield.
The entire NW Financial team is at your disposal, please feel free to contact us on our cell phones or by email. We all weathered the storms of 9/11, the Great Recession and Super Storm Sandy and I’m sure we will all weather this storm as well. Keep isolated and stay healthy!!