Municipal Market Volatility and Liquidity Amid COVID-19 (March 16, 2020)

Dexter Torres and Kenneth Potts
Dexter Torres and Kenneth Potts

ven the continued market volatility, we want to make sure we continue providing clients with regular updates on the state of the municipal bond market. After talking to some other market participants,  we wanted to put into context the current market environment and liquidity in comparison with the financial crisis in 2008. Some observations included below:

Mid-week last week there was virtually no liquidity. But as we’ve had the drastic rate moves, (municipal bond yields are higher by 75bps in the last few trading days), we have seen “some” buyers come in. There has been a mixed response from the dealers – some say that liquidity is better than during the financial crisis, and some say it has been worse.

The main difference between the illiquidity now and during the financial crisis, is that in 2008, the banks really did not know if they were going to survive and open their doors the next day. Back then the big question was “will the financial system fully collapse?”.  That does not seem to be the issue today. Right now, the big fear is that COVID-19 will continue to spread and cause a severe pullback in economic activity to the point of a deep recession. We are hearing that the stability of the banks and the financial system is not currently the issue. It appears the dealer desks are in a holding pattern and lightening up on their inventory, and banks themselves are actual buyers and the crossover buyer is back in play as municipal- treasury ratios have cheapened dramatically.

Municipal bond buyers have popped up at adjusted cheaper levels. There is talk of more individual account investment managers returning to buying, and nontraditional buyers coming into the sector to take advantage of these higher rates and ratios.

Still, liquidity is poor. Fund flows will most likely show large outflows, (by one measure there was approx. $3.4bn in outflows on Friday alone). Ratios across the curve are north of 200%, with some trades in the front end occurring at even cheaper ratios.

We believe this may prove to be another good buying opportunity for those that can handle the volatility. And as always, we will continue providing market color in these turbulent times.

Kenneth Potts
Senior Vice President, Portfolio Manager

Dexter Torres
Senior Vice President and Portfolio Manager, Head of Trading

Important Disclosures

Fiera Capital Corporation is a global asset management firm with affiliates in various jurisdictions (collectively, “Fiera Capital”). The information and opinions expressed herein relate to Fiera Capital’s investment advisory services and investment funds and are provided for informational purposes only. It is subject to change and should not be relied upon as the basis of any investment or disposition decisions. While not exhaustive in nature, these Important Disclosures provide important information about Fiera Capital and its services and are intended to be read and understood in association with all materials available on Fiera Capital’s websites.

Past performance is no guarantee of future results. All investments pose the risk of loss and there is no guarantee that any of the benefits expressed herein will be achieved or realized. Valuations and returns are computed and stated in Canadian dollars, unless otherwise noted. The information provided herein does not constitute investment advice and should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security or other financial instrument. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accuracy of, or responsibility for, decisions based on such information. Any opinions expressed herein reflect a judgment at the date of publication and are subject to change. Although statements of fact and data contained in this presentation have been obtained from, and are based upon, sources that Fiera Capital believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. No liability will be accepted for any direct, indirect, incidental or consequential loss or damage of any kind arising out of the use of all or any of this material.

Certain information contained in this material constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results, including actual performance, may differ materially from those reflected or contemplated in such forward-looking statements.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent with respect to any funds or accounts managed by any Fiera Capital entity.

Each Fiera Capital entity provides investment advisory services or offers investment funds only in those jurisdictions where such entity and/or the relevant product is registered or authorized to provide such services pursuant to an applicable exemption from such registration. Thus, certain products, services, and information related thereto provided in the materials may not be available to residents of certain jurisdictions. Please consult the specific disclosures relating to the products or services in question for further information regarding the legal requirements (including any offering restrictions) applicable to your jurisdiction. For details on the particular registration of, or exemptions therefrom relied upon by, any Fiera Capital entity, please consult this webpage.

Important risk factors

Emerging Markets risks – an investment in emerging markets may be subject to greater risk due to investing in emerging market countries, which may introduce greater volatility and political, economic, and currency risks, as well as differences in accounting methods.

Non-Investment Grade Credit risks – an investment in non-investment grade credit may be subject to greater risk due to investing in low-rated or low-investment grade debt securities, which may introduce greater liquidity and counterparty default risks.

Alternative Investments risks – Alternative investments are speculative and involve a great deal of risk and are not suitable for all investors. There can be no assurance that a manager’s strategy or target objective will be successful. The overall performance of the strategy is dependent not only on investment performance but also on a manager’s ability to source assets. Investment return and principal value will fluctuate so that an investor’s units, if and when redeemed, may be worth more or less than original cost. The fees and expenses charged within the strategy may offset its total return. Exposure to currency fluctuations may have an impact on such strategy’s cash flow and asset values denominated in the currency of domicile. The use of leverage could increase the risks of an investment. Portfolio investments may be subject to high levels of regulation which could result in risks related to delays in obtaining relevant permits or approvals. Investors should be aware that there will be instances where the Fiera Capital entities and/or their clients will experience actual conflicts of interest associated with the management of one or more strategies.