WASHINGTON - The municipal bond market is saying goodbye to the old year and ringing in the new year with a resounding hurrah. In its usual quiet and efficient manner, a network of broker-dealers and underwriters in the tax-exempt market, serving hundreds of state and local governments and millions of investors, enjoyed a record year.
While the final figures for 1992 are not in yet, a preliminary estimate from the Public Securities Association, the trade group that represents the municipal finance market, puts total municipal bond volume in 1992 at 274 billion. That's up 30% from the $210 billion total racked up in 1991, and it beats the all-time high of $245 billion set in 1985, when market participants rushed to beat tax law changes enacted by Congress.
Low interest rates in 1992 were the main force behind the rush by municipal issuers to come to market to meet their financing needs for schools, hospitals, roads, and other public projects. State and local governments also found it advantageous to refinance existing debt, bringing bond refundings to an estimated record high of $95 billion.
This year saw low interest rates go even lower. With the economy showing few signs of vigor, the Federal Reserve trimmed short-term rates from 4% in January to the current 3%. The Bond Buyer's 20-bond index of general obligation yields started out in January at 6.52%, the lowest level since 1979. As this year closes out, the index was down another notch to 6.45%.
The good news is that even with the lowest interest rates in years, the bond market is going into 1993 on a bullish note, with some analysts expressing optimism that long-term and short-term rates may hold fairly steady. That means investors in the tax-exempt market should continue to get attractive coupon payments and don't have to worry much about lower prices on their bonds. State and local governments can choose their own timing for coming to market without fear of rapidly escalating rates.
The benign interest rate environment is based on impressive gains that have been made in reducing inflation over the past two years. Official consumer prices rose a mild 3% this year, and Federal Reserve officials are hopeful more progress against inflation can be made in 1993. Gold and other commodity prices, which typically signal an upturn in inflation, have been going down.
Municipal issuers are expected to begin calling some high-coupon bonds paying double-digit rates in January, and the huge wave of refundings should diminish in 1993. Still, the backlog of municipal projects to be financed bodes well for the industry. PSA is projecting that total bond volume will reach $135 billion in 1993, which would be the third best year on record.
Politically, the way things are turning for the municipal market could not be better. President-elect Bill Clinton's election brings to the White House a former state governor who is familiar with bonds and seems sympathetic to their use to meet his campaign pledge of rebuilding America.
Equally important, infrastructure investment is an almost sure bet to serve as a cornerstone in Clinton's pl;ins for improving long-term U.S. economic performance. During the campaign, Clinton pledged to step up federal outlays for roads, communications, and other programs by $20 billion a year, and he has given no sign of backing away from this pledge.
If anything, Clinton's comments during the economic conference in Little Rock highlighted his interest in long-term programs and, one can hope, some form of deficit reduction that will reassure the bond market and keep rates steady.
Clinton also seems determined to raise tax rates for high-income individuals, heightening the appeal of the tax-exempt market. Congress, in all likelihood, will adopt a budget package that complies with Clinton's wishes for higher rates.
Happy New Year, to all the players in the municipal bond market.