Stimulus package instills confidence, but more will be needed

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      By Craig R. Brandon, CFACo-Director of Municipal Investments, Eaton Vance Management and Eric Stein, CFACo-Director of Global Income, Eaton Vance Management

      Boston - On the heels of unprecedented action by the Federal Reserve to keep financial markets functioning as well as possible and to provide sufficient short-term credit to the broader economy, Congress and the White House struck a deal on Wednesday for a $2 trillion stimulus package to soften the economic blow of the COVID-I9 pandemic.

      Municipal bond prices surged yesterday, following a period of unprecedented volatility arising from concerns about the impact of COVID-19 on state and local governments, airports, hospitals and other tax-exempt bond issuers. Today, Craig Brandon, Co-Director of Municipal Investments, and Eric Stein, Co-Director of Global Income, offer their views on the stimulus package, as it currently stands, and its impact on the municipal market and the broader economy.

      Craig Brandon: A tentative agreement among Senate Democrats and Republicans early Wednesday morning on S.3548, The Coronavirus Aid, Relief, and Economic Security Act, drove a historic rally in the municipal bond market. The proposed bill includes broad provisions aimed at ensuring state and local governments as well as hospitals continue to provide essential services during this time of national crisis.

      Proposals that will directly benefit the municipal bond market include:

      • $150 billion Coronavirus Relief Fund that will provide state, local and tribal governments with additional resources to address this pandemic
      • $100 billion for hospitals and other health care providers to cover unreimbursed health care-related expenses or lost revenues attributed to this public health emergency
      • $30 billion for other health care-related and biomedical research costs
      • $13.5 billion for elementary and secondary education
      • $14.25 billion for colleges and universities
      • $10 billion to help publicly owned, commercial airports
      • $25 billion for public transit systems
      • Direct aid to small businesses such as restaurants and $1,200 payments to individuals ($2,400 to couples) under certain income thresholds, which will help sustain the local sales tax collections that state and local governments rely on for cash flow

      This massive package impacts almost every sector of the municipal bond market, so it gave investors today confidence that municipal issuers will have access to significant liquidity to bolster their credit profiles and meet debt service obligations through this crisis.

      Although it is a very positive development, we recognize that the act passed by the Senate must still be approved by the House of Representatives, where procedural hurdles remain high. We could witness short-term volatility in the municipal market in the meantime, but we remain optimistic that a version of this package will eventually be enacted, providing a degree of stability to the municipal bond market after the most volatile two-week period in its history.

      Eric Stein: The impact to the municipal market is significant, and I think of its goals as being very similar to how I've been viewing the Fed's goals to date, which is to lend money to the broad economy to get us through this challenging period.

      The word stimulus is in some ways a misnomer because I think the whole goal of this package is really bridge financing. I don't see this package as stimulating economic growth, but I do think it goes a long way toward dulling some of the pain from the eventual recession and getting us from where we are today to three to six months from now, when the COVID-19 pandemic weakens.

      Craig hit all the key points affecting the municipal market, and I would note the increase in unemployment insurance, which is a big positive for the economy, and the provision for no buybacks or dividends for corporations receiving loans for one full year. The impact of this part of the legislation could be considerable for some companies.

      From my perspective, I am encouraged by the increase in the Treasury's exchange stabilization fund (ESF). This fund has historically been used for intervention in the currency market but, more recently, it has been used as an equity capital injection for some of the Fed's lending programs that have recently been announced, including a significant new one called the Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses.

      Bottom line: This package is a big positive for munis and the economy at large. The broad market rally we saw on Tuesday and Wednesday was due at least in part to the expectations that the "stimulus" would pass. While this bridge financing was a necessary step, we may well need more traditional and creative stimulus bills beyond this one.