Taxpayers Expect Hikes, Buy Municipal Bonds
MUNICIPAL bond sales are setting records, sparked by investors eager to seek attractive yields and shelter income from anticipated tax increases under President Clinton.
Both the supply of bonds and demand for bonds is running "very strong," says Jeffrey Kratz, a vice president with John Nuveen & Co., in Chicago. "This is turning out to be a record year for new issues of municipal bonds."
That reflects the low interest rate environment as bond issuers refinance debt. "It also reflects the need for rebuilding the nation's infrastructure," he says.
According to Jim Tanajewski, a bond specialist with Securities Data Corporation, "1992 is already a banner year for new issues .... Once we see the Clinton administration's plans for stimulating the economy, then we'll see even more issues coming on the market."
Ironically, the strong interest in municipal bonds in the investment community runs somewhat counter to the overall bond market, which is worried about a possible resurgence of inflation. Higher inflation could render existing bonds, such as corporate issues and Treasury bonds, less valuable.
LAST year a record $170 billion worth of long-term municipal bonds of 13 months or more were sold. That reflects the total value of some 10,599 issues. Now 1992 is outpacing 1991. As of Nov. 13, some 10,302 long-term issues have come to market, with a value of $195 billion, says Mr. Tanajewski. The Securities Data Corporation collects national statistics on new bond issues around the US. "The `muni' market is currently closing in on $200 billion in sales, and could well surpass that level."
Of the $195 billion in new issues this year, around 38 percent of the total involves issues that replace (or "refund") older municipal issues that originally carried much higher interest rates.
Yields on municipals are currently running between 6.5l percent and 7 percent says Mr. Kratz, of Nuveen. But that equals a yield of between 9.40 percent and 10 percent for a person in the 31 percent tax bracket. Municipal bonds are usually exempt from federal and some state taxes.
A NUMBER of mutual funds that invest in municipal bonds are also selling well, including:
* Through September 30, total sales of national long-term municipal bond funds - that is, portfolios of municipal bonds from diverse jurisdictions - reached $23 billion, compared to sales of $15 billion for the same period in 1991, says John Collins of the Investment Company Institute in Washington.
* Sales of single-state bond funds reached $18 billion through Sept. 30, compared to sales of $14 billion for the same period in 1991.
* Total assets of national bond funds stood at $106 billion on Sept. 30, compared to assets of $84 billion in the same period in 1991.
* Assets of single-state municipal bond funds stood at $80 billion on September 30, compared to $61 billion in the same period last year.
"When the Democratic convention began to focus on the need for economic stimulus and voters focused on the issue of deficit reduction on the [Ross] Perot side, and when the political debate turned to possible new tax hikes on the wealthy, investors became very aware of municipal bond funds," Mr. Collins says.
The Clinton proposals on the infrastructure are clearly drawing investors' attention. The Public Securities Association, a New York-based bond trade group, has formed an economic advisory committee to "look ahead to the impact of the Clinton [infrastructure] plans on credit markets," says Joe Sims, a spokesman. The group will issue a preliminary report on Dec. 1.