Municipal yields hit 38-year lows as investors fleeing coronavirus risk take refuge in state, local debt

Investors are filing into the municipal market as the coronavirus selloff pushes them out of risk assets.
Municipal yields were already ticking up before the selloff, a product of changes to the tax code and increasing access to public debt through mutual and exchange-traded funds.
Visit Business Insider's homepage for more stories .

The $4 trillion municipal bond market is more expensive than it's been in 38 years.

Investors are driving down yields in the muni markets as they flee risk assets seen as liklier to get hit during the coronavirus selloff. The S&P Municipal Bond Index registered the largest one-day jump in 20 months, The Wall Street Journal reported .

High-grade, tax-exempt 30-year municipal yields fell to 1.627% on Monday that's a 46% reduction on yields from the same month last year, The Wall Street Journal reported.

Various trends have coincided to set the municipal market on this week's footing. The global health threat coronavirus presented became clear over the weekend as countries from Italy to Iran reported spikes in cases. The Centers for Disease Control laid out its pandemic plans Tuesday: "It's not so much a question of if this will happen anymore, but rather more a question of exactly when this will happen and how many people in this country will have severe illness," Dr. Nancy Messonnier, the head of the National Center for Immunization and Respiratory Diseases, said in a press conference.

The Dow closed down nearly 900 points, finishing its worst two-day point drop ever.

Investors wary of the impact coronavirus could have on companies and their stocks may flee to municipal bonds, perceived as safer. And as yields hit record territory, investors may reach into lower-grade public debt in search of a better return. Those same issuers will find it easier to finance debt, with record-low yields pushing down borrowing costs, The Wall Street Journal reported.

But coronavirus is not the only factor pushing up municipal bond prices, which were already rising before the selloff. Demand has spiked due to the 2017 tax law, which boosted interest in municipal products for their tax-free properties, The Journal reported. Further, more exchange-traded and mutual funds carrying municipal debt have cropped up in recent years, making a once notoriously illiquid market easier to trade in, The Journal said.

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption