Investors have piled into municipal bonds since Democrats clinched control of the Senate last week, as money managers positioned themselves for billions of dollars of aid to cash-strapped local governments.
Prices of lower-rated municipal bonds have surged in the lead-up to the announcement of US president-elect Joe Biden’s $1.9tn stimulus plan on Thursday evening, which included $350bn for state and local governments dealing with the fallout from the coronavirus crisis.
In the days after Democrats won two Senate contests that gave them control of both chambers of Congress, investors have directed $2.5bn into funds that invest in municipal debt, the largest inflow in at least a decade, according to EPFR. Rival data provider Lipper estimated the inflows were the third-biggest in its records dating back to 1992.
“State and some local economies are in a better condition than expected and you layer on the new stimulus and . . . that helps,” said Catherine Stienstra, the head of municipal bond investment at Columbia Threadneedle.
Ms Stienstra added that the broad outlines of the stimulus plan laid out by Mr Biden, including cutting larger cheques to individuals, would likely trickle down and further bolster the finances of hard-hit state and local governments.
Mr Biden’s plan marks a sea-change for state and local governments that had been left out of the most recent $900bn programme passed by congressional leaders in December — despite strong objections from states and cities, which had just lost another key source of support from the Federal Reserve.
The prospects of direct aid after Mr Biden takes office has helped to bolster the appeal of even the most financially stressed localities to investors and has helped suppress borrowing costs. Bonds issued by Illinois, New Jersey, New York’s transit authority and even the US territory of Puerto Rico have rallied since the election.
The yield on Illinois state debt maturing in 2033 fell to 4.2 per cent on Thursday. That was down from 5.06 per cent on election day in November, data from the Municipal Securities Rulemaking Board showed. For investors in lower-rated state and local debt, the yields have remained appealing. Junk municipal bonds have returned 0.94 per cent in the first two weeks of the year, compared to a 0.19 per cent loss by the broader muni market, according to Ice Data Services. Yields fall as bond prices rise.
“The potential of having more money sent their way is certainly 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, warned investors against chasing the rally in riskier municipal bonds, however, given the challenges the Biden administration may face in convincing enough legislators to sign on to his spending plan.
“We expect the issue of direct aid to state and local governments to be strongly debated,” he said. “Some states are reporting greater revenues since the pandemic started relative to the same time last year which will likely be used as an argument against providing aid.”