Dark pool activity was detected in the muni-bond market on Thursday, April 9, 2020.

The Federal Reserve is buying local and State municipal bonds for the first time which really shows how much local and state budgets are in shortfall due to shelter-in-place orders meant to stop the spread of the coronavirus.

The Fed’s program is called the municipal liquidity facility and it means that the Fed can directly buy up to $500 billion in municipal bonds from states and cities. The problem though is that it’s currently only for cities with more than one million people, and counties with more than two million people. That means that the municipal liquidity facility program isn’t open to most local governments as there are only 10 cities and 16 counties in the U.S. that meet the Fed’s criteria. However, states can ask the Fed to lift their borrowing caps on behalf of smaller municipalities and other entities that are ineligible.

It’s an interesting idea to front-run muni ETFs in anticipation of the Fed’s actions BUT liquidity in these markets might be a problem. Most muni bond ETFs have very low liquidity meaning it’s possible you could get stuck in the trade with a bid and an ask too far apart. I recommend that you do your own due diligence.