Add another voice to the clamor in Washington for lower interest rates: municipalities. The tax-exempt bond market in the last 60 days has reached a level not seen since General Lee was advancing on Gettysburg. The Bond Buyer municipal bond average, composed of 20 municipal bonds, soared from 10.73 percent on June 26 to a current 13.21 percent.
For some issuers, who had to enter the market during the last three panic-stricken weeks, the interest rates needed to lure investors into the markets have been even higher. Washington Public Power System (WPPS), rated AAA , two weeks ago raised $750 million for a long-term bond at a cost of 15 percent.And state agencies such as the Oklahoma Housing Finance Agency recently offered investors 12 percent for a two-year exempt bond.
Not only have these rates made the history books, but according to Alvan Markle, vice-president and director of fixed income research at Butcher & Singer , a Philadelphia brokerage house, they have also departed from the historical pattern of taxexempt bonds yielding 70 percent of the long-term Treasury bill rate. In the case of the WPPS bonds, the yield was nearly equivalent to those of long-term Treasury bills. As of Friday, Sept. 11, tax-exempt bonds were yielding the equivalent of 84 percent of the Treasury bill rate.
However, vetern bond market observers don't believe this pattern will persist. Robert van Kampen, partner at the Chicago municipal bond firm of van Kampen, Filken & Merritt Inc., believes that once the markets develop some stability, yields will return to their historical patterns. "The market over the past two weeks," says Mr. van Kampen, "has been a psychological market. I've only seen these types of markets six or seven times in the past 22 years."
Mr. van Kampen believes the tax-exempt markets, like the stock and long-term bond markets, have been anticipating the effects of the new tax law. One of those impacts will be felt next quarter when the government begins raising $30 billion to $35 billion in new cash to meet its deficit. "I've seen some forecasts for a gloomy market all the way through the second quarter of next year," says Mr. Markle.
At the same time, explains Jean Rousseau, managing director of the Public Finance Group at Merrill Lynch, Pierce, Fenner & Smith Inc., banks and casualty insurance companies, the major institutional purchasers of municipal bonds, "have hunkered down and seem to have a reduced need for tax-exempt bonds." The lack of interest by the institutions has only aggravated the general uncertainty.
Another cloud hanging over the tax-exempt market has been the All-Savers Certificate, of which the first $1,000 in interest will be tax exempt. Mr. Rousseau says he believes the short-term municipal bond market has increased at least 1 percent in anticipation of the certificates. A one-year All-Savers Certificate will yield 12.58 percent.
However, the certificates' impact will be limited. Most buyers of municipal bonds purchase more than $8,000 worth of bonds -- the amount equivalent to the tax-exempt feature of the certificates. "My feeling about the All-Savers," says James Skyrm, director of municipal research for Prescott Ball & Turben, "is they will pull money out of savings accounts and the money market funds, not the muni bond market."
In spite of the record yields, Mr. Rousseau says the bond calendar looks formidable in the weeks ahead. "There is a lot of seasonal borrowing by states and municipalities," he concludes, "as well as a number of utilities that must borrow money." Still other municipalities are borrowing from their local banks, or postponing new issues for as long as possible.
The gloom and doom may be thick on Wall Street, but analyst Robert Grossman of Prescott Ball & Turben, a Cleveland-based brokerage house, thinks the market is ripe for a significant rally. Mr. Grossman recently told his clients to expect the Dow Jones industrial average to surge to 900 to 950 from its current 850 level.
Behind the rebound, says the analyst, will be some improvement in the money markets -- with the prime interest rate falling a few pegs. "I think business has borrowed more money than it needs and we may see a slackening of loan demand later." The market, he hypothesizes, will begin to anticipate a sharp decline in interest rates either at the end of the year or the beginning of next year.
The Dow Jones industrial average managed to halt its 200-point slide last week, posting a gain of 11.12 points and closing at 872.80. Late in the week, the market showed its best gains, but many analysts remained cynical about the advance, calling it a "technical" rebound after the pasting the market has suffered since June. The market, analysts said, is still bracing itself for the fourth quarter. Takeover candidates continued to sparkle, especially Zapata, which is considering a takeover bid from Occidental Petroleum