One can ponder what could have been if we still had advanced refunding with these current rates. It would have been a beautiful environment for all participants.
But we need to deal with the here and now. The downslide in rates may be viewed from a number of perspectives. For issuers coming to market, having a long MMD AAA at 1.84% is their wish come true. Even if the issuer is a weaker credit, add 50 basis points to 100 and that is still an extraordinary rate-taking.
If we assume this is the case, then why is the market not being hit with huge supply?
We have had the longest expansion on record, rates are at or near record lows, inflows are strong, and the municipal capital needs are great. It is simple actually. The revenue side of the ledger is fully accounted for and new revenue streams are quite hard to come by. Raising taxes in a soon-to-be election year may cause some pause for some. But the risk is that we would miss this exceptional window of opportunity by procrastinating and prevaricating about what is presently transpiring. The industry needs to act with or without the backing and assistance of any uptick in federal aid and tax credits. The latter exists with the
The opportunity in 100-year bonds is another special current development, which the University of Virginia is set to demonstrate. There is some experience with this maturity before. All I can say is that if it is good enough for Princeton, why is it not good enough for the federal government? Is anyone worried that the nation will not be around but Princeton will be? Some of the concerns are technical in nature but there is also some circumspection about the true potential level of demand.
Years ago, just trying to interpolate where a 40-year municipal would trade was a real exercise, the 100-year has to trade at a spread to the 30-year bond. Since there are a few examples around it is somewhat easier.
Ultimately, folks on the desks will come up with the best call on this topic.
It is ironic that all of this consideration and debate about originating very long bonds is coming at a time when there is more fear about a slowdown in the economy. If a 30-year bond takes a hit in a down market you may only imagine what would be the effect on the 100-year bond. Because not much has been sold and traded and what has been done has been accomplished on more of a bespoke basis, perhaps, the potential erosion in value would not be all that great.
One of the premises behind Modern Monetary Theory (MMT) is that we should not be all that concerned about the level of debt. Tell that to Moody’s and see what happens. Certainly, states and localities must be more mindful than the federal government about their respective debt levels. Debt levels are not always highly correlated with rating outcomes, but the absolute levels still matter.
Another factor driving some of the consideration for contemplating bringing longer paper to market is the growing interest and presence of the foreign buyer in municipals. It was only a recent development when the long bond turned negative in Germany. Even if the long municipal is only at, say, 2.5% for an A type credit, that is a great deal more than being in negative territory.
I know that for some larger transactions a foreign road-show has been included before the recent downdraft in rates. We have to believe that such tours will be taking on even more importance.
I have witnessed quite a few rate fluctuations in 40-plus years in the business; but, I really do believe that this time is different. And furthermore, it may be a lasting scenario for some time. Perhaps, that is why issuers do not feel the need to move too quickly. The present market status is a clear reason to consult with a municipal advisor.
