March 25, 2020 / 8:37 PM / in 8 days

UPDATE 1-Muni market rallies on help from U.S. coronavirus stimulus bill

(Recasts, adds closing yields, muni provisions in federal legislation, comment by association official, background on previous Fed action)

CHICAGO, March 25 (Reuters) - Yields on top-rated U.S. municipal bonds dropped on Wednesday amid a market rally sparked mainly by a massive coronavirus aid package in Congress that includes a provision authorizing the Federal Reserve to buy longer-term muni debt.

Greg Saulnier, Municipal Market Data’s (MMD) managing analyst, said low issuance over the last two weeks and previous Fed actions to help liquidity in the short end of the muni market also helped push yields lower.

“It’s just the confluence of everything,” he said.

The $3.8 trillion market, where states, cities, schools and other issuers sell debt, took a beating last week amid a selling frenzy by funds and others scrambling for cash as coronavirus fears wreak havoc on global markets.

At Wednesday’s close, yields on MMD’s benchmark triple-A scale plummeted 65 basis points across the curve, following a tumble of as much as 25 basis points on Tuesday. The 10-year yield, which climbed to 2.79% last week, ended the day at 1.94%.

A $2 trillion bill up for a vote in the U.S. Senate on Wednesday includes $150 billion to help state and local governments fight the virus outbreak in addition to allowing Fed purchases of munis.

Emily Swenson Brock, director of the Government Finance Officers Association’s federal liaison center, said the legislation would lift a restriction prohibiting the Fed from buying debt with maturities exceeding six months and would allow purchases from all sectors of the muni market.

“This is huge. It addresses a lot of the challenges we have so far,” she said.

In recent days, the Fed addressed a liquidity crunch in the short end of the muni market by including short-term and variable-rate muni debt in its unprecedented credit support package.

Reporting by Karen Pierog in Chicago Editing by Chris Reese and Matthew Lewis

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