Highlights

  • Going into the crisis, the municipal market was in very strong technical shape. prior to March 2020, quality and sector spreads were compressing and many investors were reaching for yield. The COVID-19 outbreak has altered these dynamics.
  • Municipal bond fund flows reversed when the COVID-19 crisis hit in March, and more than $40 billion exited the market in just a three-week period. Pressure from redemptions produced a severe liquidity squeeze, exacerbated by leveraged funds reeling from the sharp rise in rates.
  • Now that we’re several weeks past the liquidity crisis, credit and sector valuations appear to reflect deteriorating fundamentals. The economic shutdown has caused a falloff in revenues and investors are concerned about the longer-term prospects for large sectors of the municipal market, including mass transit, hospitals, airports, convention centers and higher education, among others.
  • In general, Loomis, Sayles, & Company believes the current credit dislocation can provide a better opportunity to capture potential alpha in the municipal market than has been seen for some time.
  • When and how COVID-19 quarantine and social distancing requirements can be eased could determine the financial viability of some issuers going forward.

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