March 20, 2020

What Happened

Over the past two weeks, tax-exempt Municipal bonds (Munis) have endured significant price weakness, with yields spiking more than 200 basis points (2%) across many parts of the AAA Muni curve. Strong, urgent selling pressure, particularly from individual or ‘retail’ investors, overwhelmed the pool of willing Muni buyers. Municipal bond fund managers became forced sellers of their funds’ underlying bonds as their clients sought immediate withdrawals. The liquidity—or the ease with which one can exit a given position or market—fell dramatically in the Muni space. Municipal bond yields are still rising even as the US Treasury market is discovering more solid footing. That has pushed Muni-to-US Treasury ratios (i.e., the yield offered by a Municipal bond relative to a US Treasury bond with a similar maturity) to all-time highs. These historical measures help put the sheer magnitude of the liquidity strain in context.

Our Take

Investors who typically look to their Municipal bond portfolios for stability are using these instruments to raise cash in the face of mounting uncertainty around the coronavirus (COVID-19) pandemic. The number of willing buyers has been very thin over the past two weeks as many face their own liquidity constraints. The decline in liquidity created a negative feedback loop that sent Municipal bond prices significantly lower. Many sellers approached the market with a singular mindset: sell now, ask questions later. As a result, AAA-rated Muni-to-US Treasury ratios are north of 2.5 between 1-5 year maturities. Two-year AAA Municipal bonds offer more than 2.0% higher absolute yields than two-year US Treasury notes, despite Munis’ potential tax benefits.

Today, the US Federal Reserve announced that its newly created Money Market Mutual Fund Liquidity Facility will allow the Fed to purchase shorter-dated Municipal bonds. This, along with the numerous other liquidity facilities the Fed resurrected recently from its financial crisis playbook, should help alleviate some of the liquidity constraints in the front end of the Muni curve. Therefore, we expect these dislocations in high-grade Municipals to slowly improve. That would help bring Muni-to-Treasury ratios toward healthier levels, which typically hover near 1.0.

Bottom Line

Thus far, the severe dislocation in the Muni market has been primarily driven by the sell-at-any-cost mindset that has plagued high-quality fixed income markets. The COVID-19 impact will undoubtedly pressure state and local government budgets due to lost tax revenue and the expense of launching a multi-faceted response to the virus. The severity of that impact is largely dependent upon containing the virus as swiftly as possible and decisive federal financial support.

For longer-term investors willing to accept risk, we believe there are emergent opportunities in high-grade Munis. We recommend investors maintain a high-quality allocation and emphasize general obligation issuers with ample reserves and investment grade essential purpose revenue bonds (i.e., water and sewer, power providers).


This material was provided by SunTrust Private Wealth Management for use by BB&T Wealth.

Advisory managed account programs entail risks, including possible loss of principal and may not be suitable for all investors. Please speak to your advisor to request a firm brochure which includes program details, including risks, fees and expenses.

Investing in the bond market is subject to certain risks, including market, interest rate, issuer and inflation risk; investments may be worth more or less than the original cost when redeemed.  The value of most bond strategies and fixed income securities are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise, and values rise when interest rates decline

SunTrust Private Wealth Management is a marketing name used by Truist Financial Corporation and the following affiliates: Banking products and services, including loans and deposit accounts, are provided by SunTrust Bank and Branch Banking and Trust Company, both now Truist Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank and Branch Banking and Trust Company, both now Truist Bank and SunTrust Delaware Trust Company. Securities, brokerage accounts and /or insurance (including annuities) are offered by SunTrust Investment Services, Inc., BB&T Securities, LLC, and P.J. Robb Variable Corp., which are SEC registered broker-dealers, members FINRA, SIPC, and a licensed insurance agency where applicable. Investment advisory services are offered by SunTrust Advisory Services, Inc., GFO Advisory Services, LLC, BB&T Securities, LLC, Sterling Capital Management, LLC, Precept Advisory Group, LLC, and BB&T Institutional Investment Advisors, Inc., each SEC registered investment advisers.  BB&T Sterling Advisors, BB&T Investments and BB&T Scott & Stringfellow are divisions of BB&T Securities, LLC. Mutual fund products are advised by Sterling Capital Management, LLC.

While this information is believed to be accurate, SunTrust Banks, Inc., now Truist Financial Corporation, including its affiliates, does not guarantee the accuracy, completeness or timeliness of, or otherwise endorse these analyses or market data.

The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Truist Financial Corporation makes no representation or guarantee as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. The information contained herein does not purport to be a complete analysis of any security, company, or industry involved.  This material is not to be construed as an offer to sell or a solicitation of an offer to buy any security.

Opinions and information expressed herein are subject to change without notice. STIS and/or its affiliates, including your Advisor, may have issued materials that are inconsistent with or may reach different conclusions than those represented in this commentary, and all opinions and information are believed to be reflective of judgments and opinions as of the date that material was originally published.  STIS is under no obligation to ensure that other materials are brought to the attention of any recipient of this commentary. 

Truist personnel are not permitted to give legal or tax advice.

Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance.

STIS/STAS shall accept no liability for any loss arising from the use of this material, nor shall STIS/STAS treat any recipient of this material as a customer or client simply by virtue of the receipt of this material.

The information herein is for persons residing in the United States of America only and is not intended for any person in any other jurisdiction.

Investors may be prohibited in certain states from purchasing some over-the-counter securities mentioned herein.

The information contained in this material is produced and copyrighted by Truist Financial Corporation and any unauthorized use, duplication, redistribution or disclosure is prohibited by law.  

STIS/STAS’s officers, employees, agents and/or affiliates may have positions in securities, options, rights, or warrants mentioned or discussed in this material.

Asset classes are represented by the following indexes. An investment cannot be made directly into an index.

S&P 500 Index is comprised of 500 widely-held securities considered to be representative of the stock market in general.

©2020 Truist Financial Corporation. SunTrust®, the SunTrust logo, and Truist are service marks of Truist Financial Corporation. All rights reserved

©2020 Truist Financial Corporation. BB&T, SunTrust®, the SunTrust logo, and Truist are service marks of Truist Financial Corporation. All rights reserved

CN2020-0693 EXP12-2020