Municipal bond interest rates have reached a nadir, according to Chris Mier, a managing director in the analytical services division of Loop Capital Markets.
After years of declines, the economic factors are lining up in favor of higher rates, Mier said during a “Municipal Bond Market Outlook” panel at the Government Finance Officers Association’s national conference in San Francisco this week.
“I want to stop short of being alarmist, but in general the factors that have kept interest rates very low are beginning to slowly reverse themselves,” Mier said during an interview following his presentation. “We’re seeing that with the Federal Reserve and the discussion about tapering off their quantitative easing. That’s caused the stock market drop recently and it’s also caused a rise in interest rates.”
With positive signs in the interest rate-sensitive sectors — the construction, housing, and automotive industries — the Fed could start talking about slowing down the pace of bond purchasing, which would cause rates to go up slightly again, Mier said.
Other positive factors that would cause higher rates are signs of stability in Europe and the threat of a 28% cap on tax exemption.
Mier’s yield range for this year is around 3.00 to 3.75%. On Tuesday, Municipal Market Data’s 30-year triple-A yield was at 3.29%.
While he doesn’t think rates will get lower, Mier also doesn’t think the Fed can afford to see them get too high.
“I think the Fed can tolerate somewhat higher rates and they might even like somewhat higher rates, but if rates start to bite, and start to slow the economy and the interest rate-sensitive sectors, they’re clearly going to try to reverse that trend,” Mier said, adding he doesn’t think the Fed would allow a move much above 50 basis points higher.
From an issuer’s perspective, he said, it’s still a great environment to issue bonds, with rates about as low as last year.
“But there’s a slow clicking to the clock here and issuers should probably not wait for any kind of abatement in interest rates,” Mier said. “They’re not going down again, in my judgment.”
Mier lowered his initial estimate of $400 billion of new supply in 2013 to between $350 and $375 million, due to slower refunding activity this year.
Along with Mier, Philadelphia’s city treasurer, Nancy Winkler, and Montague DeRose and Associates principal, James Bemis, also gave their outlooks on the market.
From an issuer’s perspective, Winkler talked about how to put together the best financing package and recommended types of transactions issuers should look into in the current market.
In addition to the traditional bond market, Winkler discussed variable rate bonds, which can offer lower rates, floating rate notes, which avoid letters of credit but may require remarketing periodically, and direct bank loans, which are useful for smaller transactions but subject to bank interest. She also discussed commercial paper programs, which are good for large ongoing capital programs that have cash flow uncertainty.
Bemis discussed the benefits of other alternatives to tax-exempt bonds. He said direct purchases may not need ratings or disclosure documents, loans offer more flexibility in terms and conditions, and private placements can offer flexibility in pricing, as well as in terms and conditions.