Current Municipal Bond Market Concerns

The municipal bond market has been severely impacted by the recession both as a result of a rollover of problems from other debt sectors and the real and perceived deficit issues for local governments in taxation and budgets.  These factors directly affect the pricing and marketing of New Jersey municipal bonds, both in and or themselves and relative to the broader debt markets particularly US Treasuries. 

Three categories of concern for issuers are:

1. Volatility - The bond market is currently characterized by a thin investor base which exacerbates volatility.  Movement and issues of concern in both the equity and Treasury markets also affect that volatility as the constantly changing relationship between US Treasury prices/yields pushes investors from one market to the other. Bond volume, economic data releases  and events, and the availability of investor funds (The availability of reinvestment proceeds from bonds that have been refunded, often occurring in January and July for instance, sometimes provide for a good time to sell bonds) also contribute to volatility.  These factors need to be considered when planning the financing. 
2. Flight to Quality - Buyers of municipal bonds are mostly interested in highly rated municipal securities, and are prepared to “look through” insured or enhanced rating to the underlying rating of the issuer.  Consequently, it is important that the bond issuers do everything they can to secure the ratings and credit enhancement deemed necessary and structure their bonds appropriately to attract investors.  This may mean requesting an underlying rating in addition to any available enhanced rating such as the AA rating based on the New Jersey School Bond Reserve Act for New Jersey school districts.  Additionally, issuers may want to carefully select from which rating agency(s) they wish to procure a rating.  Flexibility in rating criteria and recognition of higher ratings for potential municipal bond insurers may help make bonds more competitive.
3. Increase in Bank Qualified ceiling - The recently passed stimulus package has raised the bank qualification ceiling to $30 Million for “new money” bonds issued in 2009-10, but not refunding issues.  (“Bank Qualification” provides certain tax advantages to banks purchasing municipal bonds whose issuers meet certain size criteria, resulting in lower borrowing rates for issuers) Consequently, it has been suggested that smaller-sized BQ issues may not sell as well, given the availability of larger par amounts available.  Depending on whether such a disparity in rates actually develops for smaller BQ issues, it may make sense, for issuers to maximize issue size as much as possible up to the $30 Million limit for “new money” issues and $10 Million – the existing limit – for refunding issues for bonds issued over the next two years.