Fed Expands Emergency Program to Include Muni Funds After Rout

(Bloomberg) — The Federal Reserve said Friday it had expanded its emergency program to provide liquidity to money market mutual funds, allowing the purchase of assets from single-state and other tax-exempt municipal money market funds.

The Fed announced Wednesday night it created a Money Market Mutual Fund Liquidity Facility aimed at relieving pressure off prime money market funds that were seeing large institutional customer withdrawals. The Treasury Department will provide $10 billion of credit protection.

The program, administered by the Boston Fed, will provide risk-free loans to banks that will purchase a range of assets from prime money market funds, with the assets deposited with the Fed as collateral. By expanding the program to include short-term municipal bonds, it may ease the difficulty cities and states are having in raising funds.

The global health crisis has hammered municipal bonds as states and localities strain resources to prepare a medical response, help local businesses and suffer tax revenue losses as they ask people to stay at home.

Municipal bonds were headed for an 8% drop in March, their worst month of performance since 1981, according to Bloomberg Barclays (LON:) indexes.

Prime funds are those money funds eligible to invest in debt not backed by the U.S. government.

Money market funds essentially provide credit to everything from banks through repurchase agreements to corporations through purchases of commercial paper. They are a critical link the chain of short-term finance where companies borrow and lend outside the formal banking system.

(Updates with additional details from third paragraph.)

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