Tax-exempt rates have climbed steadily since July's historical lows, and the pace picked up after the presidential election. Some hospitals had to put refundings on hold, but others are speeding up plans to issue new money debt, and with the MMD now higher than Treasuries, taxable debt is looking more attractive.
In the capital markets, mean reversion theory says prices and rates eventually move back to the average. Judging from the activity in the bond markets in the last few weeks, we may already be on our way back from below-average rates for the last several years.
The 30-year MMD (Municipal Market Data) "AAA" G.O. index closed at 3.26% yesterday, up 133 basis points since the 1.93% historical low reached last July. The MMD is a benchmark widely used by bond underwriters and bondholders, and as such it drives a large portion of the not-for-profit sector's cost of funds. Just in the last three weeks since the presidential election, the MMD climbed 72 basis points. A jump of this magnitude only happened twice in the last decade; one was the Lehman bankruptcy in September 2008.
The MMD is currently yielding 25 basis points more than the Treasury yield. This is significant considering that on a taxable-equivalent basis, this represents a 5% yield for investors in the 35% tax bracket, a full 200 basis points higher than what they can earn on Treasuries.
Rising rates can impact hospitals and other tax-exempt borrowers in several ways. Higher yields have kicked a number of refundings that were previously "in the money" to the curb, which could have a negative impact on overall issuance volumes following the glut of refundings witnessed this year. While refundings may slow down, more hospitals are viewing rates as a reason to go to market for new money projects now, rather than wait and risk even higher rates down the road. Others not quite ready to borrow are looking at ways to lock in rates in anticipation of future needs. The positive spread between the MMD and Treasuries may also lead more hospitals to consider taxable debt, even if tax-exempt debt continues to offer the advantage of allowing for longer maturities.
The outcome of the FOMC meeting in two weeks could further contribute to rising rates.