Wednesday, October 4, 2023

Investors rush to Munis as Biden announces stimulus package for cash-strapped states

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Investors have piled up in municipal bonds since Democrats took control of the Senate last week, as fund managers positioned themselves for billions of dollars in aid to cash-strapped local governments.

Lower-rated municipal bond prices soared ahead of US President-elect Joe Biden’s announcement $ 1.9 billion stimulus package Thursday night, which included $ 350 billion for state and local governments in the face of the fallout from the coronavirus crisis.

In the days after the Democrats won two competitions in the Senate which gave them control of both houses of Congress, investors invested $ 2.5 billion in funds that invest in municipal debt, the largest influx in at least a decade, according to EPFR. Rival data provider Lipper estimated the entries to be the third-largest in its 1992 archive.

“The state and some local economies are in better shape than expected and you are lying on the new stimulus and. . . it helps, ”said Catherine Stienstra, head of municipal bond investments at Columbia Threadneedle.

Ms Stienstra added that the broad outlines of the stimulus package presented by Mr Biden, including cutting larger checks to individuals, would likely spill over and further strengthen the finances of hard-hit state and local governments.

Mr Biden’s plan marks a sea change for state and local governments that were left out of the last $ 900 billion program adopted by congressional leaders in December – despite strong objections from states and cities, who came losing another key source of support from the Federal Reserve.

the prospects for direct aid after Mr. Biden took office, helped to make the most financially stressed communities more attractive to investors and helped reduce borrowing costs. Bonds issued by Illinois, New Jersey, the New York Transportation Company and even the U.S. territory of Puerto Rico have rallied since the election.

The yield on Illinois state debt maturing in 2033 fell to 4.2% on Thursday. That figure was down from 5.06% on election day in November, according to data from the City Securities Regulatory Council. For investors in lower-rated public and local debt, yields remained attractive. According to Ice Data Services, junk municipal bonds returned 0.94% in the first two weeks of the year, compared to a loss of 0.19% for the overall muni market. Yields fall as bond prices rise.

Line graph of the average muni bond price, by rating (cents on the dollar) showing lower rated state and local government debt prices

“The potential of having more money sent is definitely something to be optimistic about,” said Howard Cure, director of municipal bond research at Evercore Wealth Management.

Cooper Howard, director of fixed income strategy at Charles Schwab, however, cautioned investors against continuing the riskier municipal bond rally, given the challenges the Biden administration may face in convincing enough legislators to sign his spending plan.

“We expect the issue of direct aid to states and local governments to be hotly debated,” he said. “Some states are reporting higher incomes since the start of the pandemic compared to the same time last year, which will likely be used as an argument against providing aid.”


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