MNI INSIGHT: Fed's Bigger Asset Purchases May Leave Out Munis

By Evan Ryser and Jean Yung

     WASHINGTON (MNI) - The Federal Reserve's rapid moves to buy more assets and

lend against a wider range of collateral amid the COVID-19 outbreak are unlikely

to include municipal bonds, MNI understands.

     Despite pressure from Congress, Fed officials see support for municipal

bond markets as an issue for other government bodies with a relatively limited

role for the central bank, MNI understands.

     The Fed on Sunday said it would buy Treasuries and mortgage-backed

securities to ease strains in those bedrock markets and cushion the blow to the

economy from social distancing measures being implemented to slow the spread of

the outbreak. Some have suggested the Fed be given permission to buy other

securities, including corporate bonds and longer term municipal debt. 

     House Speaker Nancy Pelosi this week urged Fed Chair Jay Powell to explore

ways to use the Fed's authority to support state and local governments. Congress

could ease the six-month maturity restriction on muni bond purchases by the Fed.

     --POLITICAL CONFLICTS

     State and local revenues are expected to drop off sharply as businesses

close amid the pandemic while laid off workers are applying for unemployment

insurance and tapping other forms of public assistance -- putting state and

local governments in significant financial trouble.

     But extending the Fed's reach into the muni market opens up political

conflicts, such as individual states lobbying the Fed to purchase their

securities, while blunter purchases of municipal bond index funds would be

likely ineffective at helping specific localities, MNI understands.

     Washington lawmakers are better positioned to address liquidity and

solvency strains in the $4 trillion municipal bond market. The federal

government could provide a credit guarantee on municipal bonds, putting them on

an even playing field with Treasury securities and housing GSEs. Alternatively,

Congress can transfer more resources to states and localities, by increasing the

federal share on Medicaid for the duration of the virus for example.

     The Fed likely prefers to stick to its indirect support of muni bonds.

Earlier this week it re-established the Primary Dealer Credit Facility, an

emergency lending facility with the biggest Wall Street banks that accepts a

wide range of collateral beyond government securities. Among the list of

eligible collateral are municipal securities. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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