Displaying items by tag: bonds
New York is the epicenter of the US coronavirus crisis, and the hit it is taking to its finances may be an example of the risk that the muni bond market is facing all across the country. Government revenue is taking a huge cut at the same time as expenditure to support the economy and its people is jumping. While the threat of a downgrade from its AA perch is only moderate, New York does have several other muni issuers that are looking much more dangerous. For example, the Metropolitan Transit Authority (MTA) and the Transitional Finance Authority (TFA). The MTA, which runs the subway and other forms of public transportation, has taken a massive revenue hit during the lockdown, with ridership down 90%.
FINSUM: Certain muni credits are gong to be devastated. For instance, even though the MTA is getting $4 bn from the recent CARES act, it is still yielding 5% versus the 2% it yielded before the Covid eruption.
Muni bonds have found their footing in the last few days. After experiencing some considerable selloffs as this crisis began to unfold, the recent stimulus package has put wind back in their sails. Munis are in the very unusual position of having yields significantly higher than Treasuries at the moment. Most investment grade munis are yielding from 1-2%, some up to 3%; while select high yield munis are seeing 5%. The bonds are definitely in a risky place right now given the potential for a long recession and a decline in revenue.
FINSUM: On a price/yield basis, munis certainly seem like a good buy at present; but they are facing some considerable risk, which accounts for yields being so much higher than Treasuries.
Any investor cannot help but have noticed very unusual movements in markets over the last couple of weeks. In particular, Treasury bonds have been behaving very oddly. After yields predictably plunged alongside stocks a couple of weeks ago, there have been abrupt movements higher, with 10-year yields rising around 90 basis points (from 0.4% to 1.3%) in just a few days. Even now, when yields would presumably be nearing zero, they have been see-sawing and are still near 1%. The reason why appears to be panic-selling in an effort to get cash in any way possibly. In particular, large investors need to meet redemptions in other areas of credit, which are much less liquid, and since getting cash for their holdings there is impossible right now, they are selling Treasury holdings to get the cash to meet redemptions.
FINSUM: This is not unlike selling your valuables to meet mortgage payments. It makes sense, but it is a worrying sign and a symptom of how dire the market has gotten.
The Fed announced an unprecedented monetary stimulus package this morning. The central bank declared that its new bond buying program was unlimited, and that it would immediately start buying hundreds of billions of different types of bonds in an effort to unclog credit markets. They also extended lending facilities to new markets such as municipal bonds.
FINSUM: The Fed has been far from shy to in reacting to this crisis, but nothing it is doing seems to be helping markets much. Post-announcement, the Dow is already down over 3%.
If anything is becoming clearer about coronavirus’ effects on the economy, it is that job losses are going to be staggering. But what will be the knock-on effects? One of the many looks likely to be a serious credit crunch. Without income flowing in, many borrowers are going to be late or default on payments, which means lenders will run short on money and everyday companies will not get their normal cash flow. Not only will this hurt earnings and weaken credit ratings and corporate solvency, but it will likely cause a serious decline in consumer credit scores that will have a lingering effect on credit for years.
FINSUM: Everyone seems to be trying to mitigate this threat. Banks are suspending mortgage payments, credit bureaus say they won’t report delinquency etc. This is unprecedented, but it remains to be seen how it plays out (and for how long).