Historically low interest rates spurred a flurry of bond activity among Connecticut municipalities for most of 2010 as cities and towns looked to take advantage of cheap rates to reduce their costs of borrowing.
In some cases, industry experts said, the activity reached levels not seen in more than 20 years.
But 2011 is getting off to a much slower start as interest rates are beginning to rise amid fears about state and local government finances and governments’ ability to meet debt obligations.
“2010 was our busiest year ever,” said Barry Bernabe, vice president of government finance at Waterbury-based Webster Bank. “But interest rates have spiked up and a lot of the activity has slowed down.”
Bernabe said Webster Bank, which serves as a financial advisor for about 50 municipalities, saw about 40 of its clients take on new debt and/or refinance existing obligations in 2010.
In some cases, Connecticut municipalities tapped the bond market, which is used to finance local projects like the construction of schools or police stations, multiple times. Bernabe said the activity was spurred by a low interest rate environment and several government initiatives that made it cheaper to borrow or refinance.
Tom Hamilton, the finance director in Norwalk, for example, said his city has refinanced its debt four times over the last two years and also bonded $19.5 million in new money for street, sidewalk, and traffic improvements.
He said the interest rates were as low as 2.3 percent on 20-year bonds, the lowest the city has seen in its history.
“We have been able to generate significant savings from the refundings,” Hamilton said.
Meanwhile, West Hartford sold $8 million in a bond offering last year at 2.36 percent interest, the lowest rate the city received in decades.
And in New Britain, the city issued about $37 million in bonds for a new police headquarters using two new government programs that provide federal subsidies on interest payments. That included $9 million of financing through Recovery Zone Economic Development bonds, and $18 million through Build America Bonds.
But of course all good things typically come to an end.
Bernabe said he has seen rates go up 1 percent in the past four to six months, a significant increase over such a short time span. That has had a major impact on the market.
Hamilton said Norwalk, for example, was scheduled to do another refinancing in November, but it didn’t happen because rates moved up. The city hasn’t tapped the bond market since July, although it’s planning a $25 million issuance later this year.
According to Thomson Reuters, states, cities and other municipalities issued about $12 billion of bonds in January, a 63 percent decline from a year ago and the lowest level in more than a decade.
Bernabe said the economic recovery and increased federal government spending/borrowing has created fears about inflation.
And concerns about state and local government’s financial woes are making investors skittish about piling cash into government debt.
In addition, the federally subsidized Build America Bonds program expired Jan. 1.
“A lot of municipal investors are selling their positions,” Bernabe said. “As result, to entice investors you have to increase rates to make them more attractive.”
Bernabe said spreads between bond ratings are also increasing, which is making it more expensive to borrow for towns and cities with lower ratings.
Historically, he said, there was little difference between AAA and AA ratings, but now spreads between them are increasing, especially with amplified fears over potential defaults.
“Communities that have fiscal discipline and maintain reserves are rewarded in the market,” Bernabe said.
