U.S. Sen. Thom Tillis (R-NC) and a bipartisan group of senators last week encouraged the U.S. Treasury Department and the Federal Reserve to take further action toward stabilizing the nation’s municipal bond market so state and local governments have access to needed medium- and long-term financing.
State and local governments are on the front lines in the fight against COVID-19 and at the same time, business closures and rising unemployment are expected to significantly reduce their revenues, according to a May 14 letter Sen. Tillis and three of his colleagues sent to U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell.
“This dynamic will become more widespread as the pandemic further weakens state and local finances,” wrote the group of lawmakers that also included U.S. Sen. Bob Menendez (D-NJ). “Ultimately, a retrenchment of state and local government spending will pose a grave threat to the Federal Reserve’s goal of maximum employment.”
Consequently, the municipal bond market has been under extraordinary stress, according to the senators, who noted that new bond issuances have drastically declined; yields compared to U.S. Treasuries of comparable maturity have skyrocketed; and investors in the secondary market have withdrawn their funds at record speed.
“Such disarray in the market will only make it more difficult for states and cities to finance the economic recovery,” wrote Sen. Tillis and his colleagues.
The lawmakers said that addressing these immediate challenges through the Municipal Liquidity Facility has been “a sensible and necessary first step.”
“However, to enhance state and local governments’ continued ability to finance the delivery of key public services for the COVID-19 health emergency and rebuild our economy, the Treasury and Federal Reserve must also ensure sufficient access to medium- and long-term capital for state and local governments,” they wrote.
Section 4003 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act permits the Treasury Department and the Federal Reserve to design a program that can support all issuers and credits, Sen. Tillis and the lawmakers wrote.
“Establishing a facility to purchase municipal bonds from issuers and in the secondary market across all points of the yield curve would ensure state and local governments across the country can meet their financing needs as they respond to the health crisis and lay the foundation for future economic growth,” according to their letter.