01.28.2014 Financial Advisory, Uncategorized No Comments

BOND MARKET ROUND UP

Interest Rates – What to expect?

Good news so far on the interest rate front.  Interest rates have been declining since year-end and appear to be trending downward in the near term.  The cost of issuing bonds is expected to remain flat and therefore a good time to issue bonds in the market.  Simple supply and demand is partially responsible for this trend. Over the next month, there are approximately $30 billion of municipal bonds that are maturing and only $12-15 billion of new bonds being issued in the market.  Demand is simply outweighing supply resulting in lower  interest rates.  Second, there are certain income tax increases that will become effective in 2014.  This creates further demand for tax-exempt bonds as those in the higher tax brackets seek tax-free income they receive from holding municipal bonds.

While the economy in California appears to continue its upswing, the host of national economic indicators, including unemployment, are still not at desired levels.  We can expect our folks in Washington to hold tight to current fiscal policies that will keep interest rates as low as possible.

Historical-Municipal-Bond-Yields

Good news from Sacramento– what does it mean for your district?

Governor Brown’s budget proposal will have a positive credit effect for schools and community colleges in California.  Credit Rating agencies, like Moody’s and Standard & Poor’s will look very favorably on the increase in per-pupil funding by 8.5% from last year as well as the 11% increase for California Community colleges.

The state also expects to pay down past state payment deferrals.   This combination will equate to a credit positive for all  districts when getting a new credit rating in 2014.  And a better credit rating means lower interest rates for your taxpayers!

Private Placements – Still around in 2014?

By all means, YES!  In speaking with some of the major banks around the state, it appears that they are still open for business when it comes to providing a direct purchase of municipal securities which include school bonds.

Their continued profitability helps support their demand for tax- free income and their interest in purchasing school bonds.  This can be a very good fit for smaller issuers as the “closing costs” of a private placement can be much less than a traditional market transaction.  For further information, or if you have any questions, please call John Greenlee at 510-596-8170 or jgreenlee@cfwinc.com.

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