Fed expands reach of new credit facility to muni bond market

WASHINGTON — The Federal Reserve is expanding its facility backing money market mutual funds to also provide support to the municipal bond market as the economy grapples with fallout from the virus pandemic.

The Fed announced the creation of the Money Market Mutual Fund Liquidity Facility Wednesday night among a host of recent emergency measures to preserve the flow of credit to households and businesses that could face financial difficulties as the coronavirus wreaks havoc on communities.

On Friday, the Fed said the program will also serve as a backstop for state and local governments through municipal bonds.

Through the facility, "the Federal Reserve Bank of Boston will now be able to make loans available to eligible financial institutions secured by certain high-quality assets purchased from single state and other tax-exempt municipal money market mutual funds," the Fed said.

The municipal bond markets have been rocked in recent days as investors have fled the historically low-risk instruments at exactly the same time state and local governments are prepping to issue more debt as the virus shuts down cities.

Earlier in the week on Tuesday, the Fed established two other credit facilities to support the commercial paper market and primary dealers to ensure the smooth flow of credit, both administered by the Federal Reserve Bank of New York.