Federal Reserve opens up seventh liquidity facility

Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Brian Cheung discuss what next steps the Federal Reserve could take as more uncertainties grow about the stimulus plan.

Video Transcript

BRIAN SOZZI: Want to bring in Brian Cheung here, our Fed correspondent. Brian, you have been diving into the municipal bond market. Walk us through it.

BRIAN CHEUNG: Yeah, so there have been some strains in the municipal bond market, among the list of other things that have faced liquidity issues as well. But specifically, we have to consider the fact that we already know that businesses across the country are closed as a result of the coronavirus-related business disruptions. But what's the next domino to fall?

And a lot of people speculate it's going to be a lot of these towns and municipalities which will be unable to collect on tax revenue because those businesses are closed. And that when you compound the fact that because no one's going outside, you can't collect on parking tickets. You won't have any municipal court fines. So there's a lot of concern that the financing for a lot of these local budgets are going to get strained.

I had the chance to sit with-- or chat with Jersey City Mayor Steven Fulop. As we know, the New York Metro area has been quite impacted by the coronavirus. Jersey City sits just across the Hudson River.

He was telling me that he was watching his municipal bond debt and saying, the market is pricing in a default for our city, even though I know that's not the case. But you have a lot of Muni bond investors that are saying, look, I don't really like where the financials for a lot of these US towns and cities are going, so I'm going to get out of the market. So he said liquidity has been a major issue.

As far as the Federal Reserve, what can it do? It could, in theory, go out directly into the market and buy short-dated Muni bonds. It's not doing that right now. It is offering a liquidity facility for those things. But a lot of people speculate the next natural move for the Fed would be to outrightly buy Muni bonds as part of QE.

ALEXIS CHRISTOFOROUS: You know, Brian, we see the Muni market drying up. What are states going to have to do? I mean, they're going to have to cut costs. Do you think we're going to start seeing mass layoffs at the state level in the coming weeks and months?

BRIAN CHEUNG: Yeah, well, I mean, talking with Mayor Fulop, he was saying that is definitely on the table. I had the chance to speak with a New York State senator who said the same thing. They haven't made any decisions yet.

But we've already started to see other municipalities make those decisions. There were reports in Pennsylvania that they were laying off over 1,000 employees. And in Cincinnati, for example, they announced that they were furloughing employees temporarily.

So you're starting to see these pockets around the country of municipalities that say, if I can't raise money by issuing debt, I have to make cuts somewhere. And one place to make that is going to be, unfortunately, layoffs. So I think as we get deeper into this crisis, if the health response is not good enough to contain it, you should expect to see more layoffs across the country.

BRIAN SOZZI: Brian, the debt is only-- it's going up to solve the situation, federal standpoint, state standpoint. Municipalities, aren't their costs of funding poised to skyrocket?

BRIAN CHEUNG: Yeah, that's exactly it. And the problem, though, is that actually, interest rates are at record lows, right? So you have a lot of these municipalities that are saying-- well, actually ahead of the real full brunt of the coronavirus, the Fed cut to zero-- and they were saying, well, hey, maybe this would be advantageous for us to actually get our funding costs lowered because we could just refinance.

The problem, though, is that you can refinance from, let's say for example, 1% to somewhere closer to where the Fed was at at the upper range now, which is about a quarter percent, but it wouldn't do anything because there's no appetite from the investors. You can issue a bond at, let's say 25 basis points, but if no one's going to be out there buying it, there's no point to issue it in the first place.

So that was the case for the Jersey City mayor. He said we explored the option to try to refinance to actually lower our costs here, but because there's no appetite, it's completely pointless. So in the end game, funding is still more expensive than it was before the Fed cut interest rates.

BRIAN SOZZI: All right, Brian Cheung, good to see you.