The US Federal Reserve is set to exclude Municipal Bonds from
the a banks liquidity pool according to Bloomberg. The most recent draft of the
rule that is due to be approved on September 3rd does not include
the debt products issued by public sector entities in the United States. Such a
move could have a substantial effect on municipal bond pricing in coming
months.
If confirmed, it could provide investment opportunities for
European banks who have already secured special status for covered bonds,
including public sector covered bonds as an increased part of their liquidity
profile. Could we be looking at a situation where US banks can't invest in their domestic municipal debt for liquidity reasons but European banks flock to it for exactly the same reason?
