Municipalities are expected to sharply curb their sales of bonds next year as interest rates edge higher, ending a three-year surge, a securities industry trade group predicted Thursday.
Cities, states and other municipal entities are expected to sell a record $289.5 billion in bonds this year, up more than 23 percent from 1992, according to a report by the Public Securities Association. Including short-term securities, municipal sales rose 20.8 percent to $334 billion.Next year, though, municipal sales of long-term bonds are projected to drop a sharp 38 percent to $178.6 billion. That's because municipalities are expected to limit their sales of bonds used to refinance older debt, as interest rates rise from this year's low levels.
The jump in 1993 sales was largely tied to the three-year decline in prevailing interest rates to the lowest levels in a generation.
Municipalities historically have sold bonds to finance projects from bridges to schools. But municipal entities used nearly two-thirds of proceeds from sales of new bonds this year to redeem older, higher-yielding debt.
By using proceeds from low-interest debt to pay off old bonds, municipalities hope to save on interest payments.
Bonds used for this purpose were projected to jump by more than one-half to a record $192.9 billion this year.
"Low interest rates in 1993 spurred state and local governments to refund a large portion of their outstanding debt, which will result in substantial debt service savings," PSA president Heather Ruth said.
A tumble in municipal issuance next year would cap a jump in bond sales that began three years ago when the Federal Reserve began lowering key short-term interest rates to try to stimulate economic growth. Municipalities sold less than $150 billion in bonds in 1990.
Also behind this year's record levels was healthy investor appetite for tax-free bonds. The Clinton administration's tax hike helped. Because muni bonds can be free of federal, state and local income taxes, wage earners who got hit with higher income taxes stand to make greater tax-equivalent returns on muni bonds than on many taxable investments.