More than $9 billion of municipal bonds may be redeemed or called from investors on Jan. 1, 1993, marking perhaps the largest redemption date in history, according to data compiled in the first issue of "The Bond Buyer Redemption Report."
Due to the vast cash payments anticipated at a time of typically limited municipal supply, some fund managers and market strategists are advising clients to begin hoarding municipals now so they do not get caught with money to spend and a paucity of low-yielding bonds in which to reinvest.
According to figures in the report, approximately $7.36 billion of municipal securities are slated to be redeemed on Jan. 1. The bonds will include pre-refunded bonds and issues that are escrowed to maturity on that date.
According to figures in the report, approximately $7.36 billion of municipal securities are slated to be redeemed on Jan. 1 The bonds will include pre-refunded bonds and issues that are escrowed to maturity on that date.
Jan. 1 also signals the first call date for another $2.1 billion of tax-exempt bonds, giving issuers the option to retire approximately $9.05 billion of debt on that date.
The figures come from the first issue of the Redemption Report, a new quarterly covering bond redemptions published by the The Bond Buyer in conjunction with Muni-View, the company's data base.
In comparison, previous range from about $6 billion to $8 billion on July 1, 1992, to as much as $11 billion on Oct 1, 1992. However, "no one has a clear idea" of the total amount of redemptions seen on previous key dates, such as July 1 and Oct. 1 of 1992, said George Friedlander, portfolio manager, high net worth, at Smith Barney, Harris Upham & Co.
However, Friedlander said he expects Jan. 1, 1993, to mark the largest redemption day so far, adding that the Redemption Report estimate may be conservative. That is because issuers usually redeem high-coupon bonds at the first optional call date, about 10 years after the bonds were issued. Long-term new-issue volume began growing around 1981, and interest rates began peaking, he added. Friedlander pointed to $46 billion of new-issue volume in 1981 and $77 billion in 1982.
Following the strategist's logic, analysts have said redemptions are expected to grow through 1995, reflecting the $228.8 billion record volume a decade earlier. The 1985 record was broken on Oct. 28.
Of the $2.1 billion that may be called Jan. 1. approximately $1.55 billion of the bonds carry a coupon rate of 7.5% or higher, which increases the likelihood that those bonds will be called, analysts said.
However, the presidential elections have kept most investors from focusing on possible Jan. 1 redemptions, said James Kochan, head of fixed-income asset management at Robert W. Baird & Co. in Milwaukee, Wis.
"They haven't focused on it because their attention has been on the elections," Kochan said. However, "the good marketing types [at brokerage firms] will be out getting people to start buying munis now."
Kochan, who has been talking with clients about positioning themselves for yearend and Jan. I cash inflows for the past few weeks, said the recent spike in tax-exempt interest rates offers investors a good buying opportunity.
Municipal yields climbed about 30 basis points in October, dealers said. For example, The Bond Buyer's 20-Bond Index was at 6.62% on Oct. 29, up nine basis points from the previous week. That compares with 6.33% on Sept. 24 and 6.27% on Oct. 1.
While January's presidential inauguration and key administrative changes, as well as the specter of higher marginal personal income tax rates, may spur price volatility at the beginning of 1993, muni rates may be peaking now, Kochan said. This is because Jan. 1 generally throws huge amounts of cash into the arms of investors from bond redemptions and coupon payments. The cash deluge, at a time when tax-exempt supply is thin, usually knocks rates lower, Kochan pointed out.
"We see high bond yields in here, and investors should be taking advantage of those higher yields to prepare for the fact that they're going to lose bonds or that yields will be lower in January." he said.
In addition, Friedlander writes in the firm's latest "Credit Market Comment" weekly fixed-income market newsletter that "the municipal bond market has simply gotten too cheap, based on the underlying fundamentals." He urged investors to "take advantage of current market conditions rather than fear them," and begin buying tax-exempt securities.
The largest issue scheduled to be called on Jan. 1 is $1.58 billion of pre-refunded Series 1985 A New Jersey Turnpike Authority revenue bonds. The 7.20% bonds are part of a $2 billion deal originally issued on Feb. 12, 1987, and have a final maturity of Jan. 1, 2018.
When the bonds were sold, the $2 billion offering constituted the largest municipal bond issue ever and for several years the issue was an often quoted benchmark for the municipal market.
About $416.37 million of the debt was redeemed in December 1991 as part of a refinancing of $2.5 billion of turnpike authority debt originally issued in 1984 and 1985, said Cathy Schladebeck, the turn-pike authority's comptroller.
The second largest scheduled redemption will be 864.68 million of the Utah's Intermountain Power Agency 10.5% bonds. The bonds were pre-refunded from a $900 million offering originally sold March 17, 1983, and have a final maturity date of July 1, 2023.
Among escrowed-to-maturity issues, approximately $9.36 million of bonds from the Lower Colorado River Authority in Austin, Tex., will mature Jan. 1. said Larry Franks, debt administrator for the agency. In addition to the escrowed to maturity bonds, another $241.58 million of the bonds will be called on the same date, Franks added. All of the bonds are from an issue of $329.81 million of 9.75% bonds issued June 1 1983.
Both pre-refunded bonds and escrowed bonds are backed by U.S. Treasuries, from which the interest and principal due on the bonds is paid. As a result, the bonds are rated triple-A.
However, a pre-refunded bond will be called or redeemed from investors on a specific date prior to maturity. A bond that is escrowed to maturity will not be redeemed until its final maturity date.
As for bonds with a first optional call date on Jan. 1, about 166.61 million of Northeast Maryland Waste Disposal Authority bonds will be redeemed from a $190.765 million issue sold in 1983, an official with the agency said. The bonds have a 10.125% coupon, a first call of Jan. 1, 1993, and a final maturity of Jan. 1. 2007, according to MuniView.
"Any issuer that can do so is looking to call [bonds] at the first optional call date," Friedlander noted. In addition, unexpected redemptions from multifamily housing and student loan bond issuers could boost Jan. 1 redemptions further, he said.
