The municipal bond market is not driven solely by the need for better roads, bridges, sewers, and schools. It is also driven by the willingness to pay for them, and taxpayers seem to be behaving responsibly these days. New-money bond financing is up.
The increase in new-money bond sales is the one bright light in a gloomy world of lower total bond volume, rumored layoffs and cutbacks, and pessimism in the muni business. It's like 1986 and 1987, but different -- bond volume is dropping faster, but bond prices are not dropping as fast.
So far in 1994, municipal bond volume is down 42% from 1993 and down 56% last month from the previous August, the largest month-to-month drop so far this year. These percentages mean volume for 1994 is running at an annual rate of $175 billion, a figure that is probably optimistic, but it could be worse. Back in the 1980s, volume took two years to be cut in half -- from $207 billion in 1985 to $105 billion in 1987.
Interest rates have risen but they haven't skyrocketed. Long-term muni bond yields have risen roughly one percentage point since early February, pushing The Bond Buyer 20-bond index up a point from 5.25% on Feb. 3 to 6.25% on Aug. 11. (It hovered at 6.18% last Thursday.) The rise reflects a much less startling move than the ascent of rates in 1987 when the index soared from 6.54% in January to 9.17% in October.
Higher interest rates have helped reduce bond refundings, and the reduction accounts for the drop-off in muni bond financing overall. New-money bond sales, as we noted, are up. New-money volume has increased by 21% for the first eight months of 1994, to $77 billion from $63 billion in the corresponding period of 1993, and that's a good sign.
Everyone knows the country's infrastructure is wearing out, needs maintenance, repair, replacement, and expansion, and everyone knows that the country is in an antitax mood. Nobody wants to pay the costs, no matter how great the needs are.
But new-money bond sales are a positive sign that states, cities, and other local governments are not abandoning their responsibilities. As the rating agencies have pointed out, economic prosperity depends on rational spending for needed capital projects. Infrastructure cannot be neglected without paying the consequences.
That doctrine means new-money bond sales should be increasing along with a growing population and an expanding economy, and it's good to see that they are.