For more than a year now, issuers in the muni bond market have experienced a steady decline in interest rates and weekly reports of cash pouring into the market. Rates seemed to go lower every day, and changes to the federal tax code set expectations that investor demand would be steady for the foreseeable future. When 10-year rates sunk below 1% less than two weeks ago, market professionals were describing conditions as “free money” for issuers.
The period of issuer bliss has quickly been interrupted. Last week, Lipper reported the first outflow of investor cash from the muni market in over a year, breaking a string of 60 consecutive weeks of inflows. Trouble in the corporate bond market spilled into munis. While credit spreads had already begun to widen, yields on tax-exempt bonds have sharply corrected to higher levels this week. The financial press has reported that some pricings have been postponed and others downsized.
The driver, of course, is the coronavirus, with investors in all markets concerned about their investments in businesses and economies. The Wall Street Journal wrote a story on the potential impact for certain muni issuers.
I’m not a lawyer and I’m not offering legal advice in this blog. But when the market’s liquidity has been interrupted, as seems to have occurred this week, my instinct as a former issuer would be to communicate proactively with my investors. It’s good customer service, and good investor relations. Here are some thoughts:
Our view at BondLink is that over the long-term, capital will flow more efficiently to issuers who are transparent, communicate with investors, and make their data easier to access using electronic channels.
This becomes much more important in the short-term whenever the market becomes illiquid and investors are under stress as they try to assess the impact of the coronavirus on their muni investments. What would I do as an issuer? I would look for ways to minimize that stress and reduce the uncertainty: more transparency and more communication.