January has passed, and we are beginning to get a good picture of what fixed-income financing will be like in 1986. Different factors are affecting the corporate, municipal and Treasury sectors of the new-issue market and are shaping the various courses each will follow.
The municipal market continues to be paralyzed by the uncertainty and ambiguity found in the Tax Reform Act of 1985 (HR 3838), which the House passed in December. To understand the damage done by this legislation, we need only look at the new-issue volume for January, which was $1.45 billion. The Bond Buyer notes that only 89 municipalities came to market in January and they sold 105 new issues. This was the smallest number of new offerings in one month for the past 15 years.
Municipal Market Data Inc. of Boston sums up the situation by saying, "With the uncertainty imposed by HR 3838, the forward calendar new-issue supply has failed to expand beyond minimal levels, keeping the supply conditions extremely light. The lack of new-issue supply has allowed the secondary float (dealers' inventory) to substantially diminish." Because it may take months for the tax reform bill to pass Congress, the only hope for resuscitating the municipal market lies in changing the effective date on the proposed legislation from Jan. 1, 1986, to Jan. 1, 1987.
Analysts feel that the Treasury will have to raise about $200 billion in new money during 1986. It originally was thought that the Treasury would have to borrow between $60 billion and $65 billion of new money during the current quarter.
However, tax-exempt entities sold a tremendous amount of issues ($70 billion) during the last quarter of 1985, and $15 billion of the proceeds were placed in special nonmarketable Treasury issues known affectionately as "slugs." This windfall, in turn, reduced the amount of new borrowing to about $36.3 billion.
During the April-to-June quarter, the Treasury estimates that it will have to borrow between $30 billion and $35 billion in new money. During the second quarter of the year -- the period in which tax receipts are heaviest -- the Treasury, until recent years, was able to pay down on the federal debt and, consequently, did not have to borrow. But in recent years, as budget deficits have exploded, the Treasury has had to borrow even when tax revenue is greatest. Add to the amount of new money that must be raised the billions of outstanding debt that will mature and must be rolled over again, and you have a lot of Treasuries coming at you.
Low interest rates and a booming stock market will combine to encourage more straight corporate bond financing, along with convertible bond and equity financing.
All in all, 1986 should be a good year for new-issue, fixed-income financing. The question really is, at what interest rate levels will the financings occur? If rates move lower, the volume of new issues could increase dramatically and, perhaps, push rates higher.