DALLAS — Spurred by falling interest rates, the Texas Transportation Commission plans to increase the size of its December general obligation bond issue by 55% to $1.4 billion.
"Since the issuance of Texas Mobility Fund refunding bonds back in June, interest rates have continued to decline," James Bass, chief financial officer at the Texas Department of Transportation, told the Texas Transportation Commission on Oct. 30.
The falling rates prompted TxDOT to increase the size of the year's final issue from the planned $900 million, a move that required new authorization from the commission.
Based on interest rates as of Oct. 21, the state would expect to save $130 million, or more than 12%, on $975 million of bonds, Bass told the commission.
If the TTC deal prices through negotiation as expected the first week of December, the agency will have sold more than $5 billion of bonds in 2014. Currently, the commission is the year's second-largest issuer behind California, which dealt $4.86 billion through October.
The TTC issued $1.26 billion of general obligation bonds on Oct. 2, earning a yield of 3.1% on 5% coupons maturing in 2044. Those bonds were issued under Proposition 12, approved by voters in 2007.
Senior managers on the upcoming issue are Bank of America Merrill Lynch and Wells Fargo Securities.
The TTC's next round of general obligation bonds come amid a flurry of year-end refundings as governments try to take advantage of low interest rates.
With the Federal Reserve's decision to end its quantitative easing policy, some investors anticipate higher interest rates in 2015.
Last week New York Fed chief William Dudley told a global conference of central bankers in Paris that the Fed will likely raise U.S. interest rates "sometime next year," according to Reuters.
That would explain the issuers' rush to market but might seem discouraging to investors, considering fixed-income investments are at nearly record-low yields.
However, Jeffrey Timlin, principal and managing director at Sage Advisory Services in Austin, said the higher rates are far from a sure thing. No one but the Fed can say when or if rates will rise, he pointed out.
"There was speculation that the Fed was going to raise rates in 2012 and they haven't yet," Timlin said.
A 2013 survey of retail investors and wealthy individuals by the State Street Center for Applied Research showed 37% of the investors' assets were held in cash. That compared with just 35% in stocks and 17% in bonds.
"The waiting game that has been going on for three or four years has been painful for those people," Timlin said.
Meanwhile, the $3.7 trillion market for munis has returned 8.6% this year, rallying for 10 straight months, according to index data from Bank of America Merrill Lynch. That growth exceeds a 6.7% return for investment-grade corporate debt and a 4.5% gain for Treasuries.
Investors who are tired of waiting for a clear signal from the Fed are taking advantage of shorter maturities in the bond market, even if the yields are modest, Timlin said. Even a yield of 30 basis points is better than nothing, he said.
"It's going to take some kind of surprise that no one is expecting to push things higher," he added. "We have something of a cushion now. We're not worried about inflation, but we're not yet worried about deflation. It's kind of that Goldilocks period."
Rising volume at the end of a lean year has cheapened munis relative to Treasuries, according to Philip Fischer, head of municipal research at Bank of America Merrill Lynch.
"Tax-exempt ratios in 10 and 30 years have risen from 88.7% and 98.4% last Friday, to 91.8% and 100% at this Thursday's close," Fischer wrote in a Nov. 7 report.
Timlin reckons there could be sufficient market appetite to wolf down the entire Texas-sized deal, even if the yields are fairly bland.
"Obviously, we're seeing a pickup in new issue supply," he said. "There's still a lot of cash on the sidelines that needs to be invested. I don't think mutual funds want to be sitting on a ton of cash going into the new year."
Despite the fact that the Texas bonds are the last of several issues from the TTC this year, they are styled 2014 A and B. Series A is a fixed-rate issue of $1.225 billion, and series B is $175 million of variable-rate bonds linked to the SIFMA index.
With this issue, the TTC will have about $17 billion of outstanding debt. The state's debt ratios on both a per-capita and personal income basis remain well below the 50-state medians at Moody's Investors Service, according to analyst Nicholas Samuels.
With Texas' economy reliant to a large degree on oil and gas production, a 25% decline in oil prices has not yet rung alarm bells at the ratings agencies.
Samuels cites as a strength Texas' "diversifying but still energy-reliant economy that is expected to continue to grow faster than the nation, and ongoing healthy growth in the state's core sales tax."
For TxDOT, falling oil prices could be a mixed blessing, slowing the Texas economy while boosting gasoline sales. Gasoline prices below $3 per gallon are expected to encourage consumption, which would mean more fuel tax revenue. Texas taxes gasoline at 20 cents per gallon, a levy that has not changed since 1991.
Regardless of what 2015 brings, this year has been a bountiful one for Texas.
Comptroller Susan Combs reported that October sales tax revenues were the second-highest of 2014, spiking 12.9% from the same month last year. The report marked 55 straight months of rising revenue.
The upcoming bond issue will also be the last under Gov. Rick Perry, who has had an outsized impact on the Texas Transportation Commission during his record 14 years in office.
Perry will be replaced by Attorney General Greg Abbott, who was elected governor Nov. 4.
When Abbott takes office, he will oversee a Texas Department of Transportation with a new funding tool in the form of Proposition 1, a constitutional amendment approved by voters Nov. 4 that siphons up to $1.7 billion from the state rainy day fund to transportation projects. The funding is designed for roads impacted by energy production in the state. But with so many sections of Texas producing oil and gas from shale formations, that could include suburban counties as well as rural.
The upcoming bonds are backed by the Mobility Fund, which was approved by voters in 2001. The Mobility Fund's initial revenues consisted of traffic-related court fines and a driver's license point surcharge.
Starting in September 2005 those sources were redirected to the state's general fund. Four other revenue sources were phased in to service Mobility Fund bonds: motor vehicle inspection fees, driver record information fees, driver's license fees, and certificate of title fees.
The maximum amount of outstanding Mobility Fund bonds allowed under state law has increased over time, to $7.2 billion at present from $4 billion originally. Approximately $5.6 billion in GO mobility bonds were outstanding as of Aug. 31.
Mobility Fund revenues increased by 2% in fiscal 2013 and are estimated to have increased by 4.2% in fiscal 2014. Combs anticipates that Mobility Fund revenues will grow by 2% annually through 2044.
