Mike Zaccardi, CFA, CMT

One of the benefits of public power is low borrowing rates for leveraged utility companies. Earlier this week, the Feds lowered its Municipal Liquidity Facility (MLF) pricing by 0.50%. The MLF is used to help state and local governments manage their way through the COVID-19 crisis that has swept the nation. It’s meant to be a backstop to ensure adequate cash flows – public utilities can be beneficiaries of the program. US counties with at least 500,000 residents can qualify for the MLF as well as cities with at least 250,000 people.

Perhaps the Fed is concerned about a second stimulus deal not making it through Congress anytime soon, so they may have proactively eased the lending market for monies.

The move helped send AAA-rated tax-exempt interest rates into negative territory (after adjusting for inflation). So borrowing costs for high-quality municipals is extremely low – try the cheapest ever.

State and local governments are struggling right now with reduced tax collections. Projects for public utility companies could be at risk. The Urban Institute reports that state tax revenue suffered another monthly decline during June. The Institute reports that only 8 states saw tax collections higher year-on-year, but 35 states had lower revenues (7 states are not tracked).

Times are tough for public power. Low commodity prices put power plants at risk for closure, and now revenue to fund operations appears to have taken a turn lower thanks to the pandemic. The Fed is doing what it can to help municipalities weather the storm. If Congress does not put forward another round of stimulus, more tough times could be ahead.

Looking at the muni yield curve, rates are slightly below that of Treasuries in the 0-7-year timeframe (so extremely low) while a premium exists further out on the curve – upwards of 75 basis points for 15-20-year debt (based on par coupon).

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Chart source: Tradingview.com