How the muni market became the epicenter of the liquidity crisis

Explanation:

The Municipal market became the epicenter of the liquidity crisis due to the concentration of power as well as the risk which is as a result in the fundamental shift of how buying and selling of Municipal bond is being done.

The outbreak of the corona virus also triggered the liquidity crisis been faced in the Muni market, although the inconsistency as been there for about 10 years.

The problem with municipal bonds (includes both state and local government bonds) is that they have already been going through a decade old crisis. Ever since the great recession, municipal bonds have been hit hard and not only Detroit bonds, others have also defaulted. But if you consider the total value of municipal bonds, the default rate has been very low, only 0.03%. Most of the bad reputation comes from Detroit due to the size of the default $8.4 billion.

Historically municipal bonds have been extremely secure, and they also pay very low returns. The current problem which happened due to corona virus was a combination of lower government revenues and higher expenses. Most large investors are running away from bonds, and that includes all types of bonds. Most sovereign bonds have been hit hard also, but a country's advantage is that they can print money.

It is basically the same advantage as the Fed's, they own the printer and if they need to they just turn it on or increase its speed. Instead, state and local governments are not able to do that. Once panic takes over institutional investors, someone will lose and very badly. This time it was the turn of municipal bonds, which are still suffering from the Detroit experience.

Other problem that municipal bonds face is that their whole market is very small compared to US securities or even corporate bonds. So a small ripple will cause a huge wave.

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