On Wednesday, as a hospital system in Memphis, Tennessee, was preparing for how to combat the spreading coronavirus, the havoc the pandemic was causing on Wall Street rippled down with its own financial hit.
Investors were rapidly hoarding cash as the economy grinds to a near halt, creating an exodus from the corner of the municipal-bond market where the health-care provider had raised cash.
With short-term yields surging, U.S. Bank more than doubled the interest rate on $124 million of variable-rate bonds issued by Methodist Le Bonheur Healthcare to 5% -- threatening to add almost $4 million a year to its annual debt payments.
The liquidity crisis that’s racing through financial markets is delivering similar blows local governments, hospitals and non-profits nationwide. At least $34.6 billion of municipal bonds with yields that reset daily have seen their interest rates surge by 2 percentage points or more in the last two days, according to data compiled by Bloomberg.
”There’s a tremendous amount of fear and concern in the market right now, and I think that when you see that panic signal going off, it’s not a surprise that clients are rushing to cash,” said Kristian Lind, a senior portfolio manager for Neuberger Berman.
The interest-rate hikes come as Wall Street’s municipal-bond desks are dealt blow after blow, with state and local debt headed for the worst monthly rout since 1987, according to Bloomberg Barclays indexes. With investors pulling money out of mutual funds, managers are being forced to dump securities to raise cash.
Variable-rate municipal bond are one of the easiest investments to unload because they can always be sold for 100 cents on the dollar as frequently as every day. Banks are required to buy the securities if there aren’t enough buyers, giving them a strong incentive to raise the rates so they don’t have to take unwanted debt into their inventories.
Kristin Kelly, a spokesperson for U.S. Bank, which serves as what’s known as the remarketing agent on the Methodist Le Bonheur’s debt, declined to comment. Sarah Farley, a spokeswoman for the health-care provider, did not have an immediate comment.
The rising rates echo what happened in 2008, when much of the variable-rate municipal market unraveled after the real estate bubble burst. The market for so-called auction-rate securities collapsed completely as investors dumped them en masse, while the yields on other bonds surged to 8%.
Major Jump
Brian Mayhew, the chief financial officer of the Metropolitan Transportation Commission in San Francisco, watched that debacle foist spiraling bills on his agency and is now seeing it unfold again.