The MMD 30-year tax-exempt yield reached a new low of 1.93% on Wednesday as foreign investors chase yield and safety and the Fed weighs in on the Brexit fallout. Hospitals planning to sell bonds in the next year or two should understand the various options available for locking in today's rates.
The triple-A 30-year Municipal Market Data index broke a new record yesterday, finishing at 1.93%. The yield on the 10-year MMD was 1.29%, not far from the 1.27% record set late last month.
When combined with compressed credit spreads, this is as close to free money as hospitals have seen. In the current environment, an "A" rated hospital can sell a 30-year term bond at a 2.70% yield while a "BBB+" hospital may be looking at around 3.00% or less.
The record low rates are due in part to foreign demand for yield and safety and the markets' heavy betting that the Fed will not raise interest rates before 2017.
The Fed entered the year expecting strong growth and a return to higher interest rates, but changed its tune after disappointing data started coming in.
Hospitals looking to sell bonds within the next year or two have several options for locking in rates:
- MMD rate lock
- Forward start, cash-settle LIBOR swap
- Forward delivery bond
- Forward bond option
In the capital markets, there is no such thing as a free lunch and each of the above options presents pros and cons discussed in our article Alternatives When Advance Refundings Don't Work.
Rate locks are not for everyone, but now may be as good a time as any for future borrowers to review their options.