Timing the Bond Market

A better understanding of market timing will help you plan your next debt issue and hedge against paying higher than average interest costs.

Market timing is a key consideration when implementing a borrowing program. While it is impossible to consistently predict the best times during any given calendar year to issue bonds,  we review interest rate patterns based on the 10-year Aaa/AAA yield, so that we can engage our clients in a meaningful conversation. Historically we have observed that there are several different months during the year when on the average, interest rates trend at or lower than the annual average interest rate level. For example, during those years when the annual average interest rate may have been 4%, looking back, on the average, during these months we have observed rates either at or below 4% and assist our clients in targeting those months for their debt issuance.

Market timing can also go “haywire” during the year. Unforeseen political events and published statements by influential analysts can move markets without warning or reason, causing interest rates to rise suddenly. Unintended consequences of comments made by the Federal Reserve have the same affect. Liberty has developed strategies to help clients carefully sell debt during such market volatility, as the following case studies illustrate.

Note: Under varying market conditions such savings may not be available.

CASE STUDY 1: Additional $2.6 million budgetary savings retained

ISSUE SIZE: $48,680,000
TERM: 20 Years
NET INTEREST RATE: 3.38%
SUMMARY: Market interest rates spiked during the 4 week period of required Board Approvals and bond sale document preparation of this refunding bond, whereby budgetary savings tanked from $5.0 million to $2.41 million. This client took Liberty’s advise and delayed the sale until the markets returned to a better pricing level, achieving the originally projected $5.0 million savings.

CASE STUDY 2: Rates return to more “normalized” levels

ISSUE SIZE: $1,306,000
TERM: 10 Years
NET INTEREST RATE: 2.39%
SUMMARY:

The 10-Year “AA” municipal market interest rate spiked .71% several weeks before this issuer was to distribute sale documents for its serial bond. The sale could not be postponed, since the purpose of the borrowing was to pay-off a Bond Anticipation Note, which was maturing at the end of the month.

Due to the sudden increase in interest rates, our client wanted our advice. Should they reissue the one-year Note, with the plan of re-entering the bond market when interest rates were more favorable or should they proceed with its original plan of “locking in” interest rates for a long term bond. We advised to proceed with the bond sale. This client took Liberty’s advice. Rates returned to a more normalized range and our client issuer was pleased.