Global Headlines and Their Impact to Bond Financings
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Many school and community districts issue bonds to finance important projects within their local communities. The cost of borrowing is a function of many factors such as the overall interest rate environment, the structure of the bonds and the district’s credit rating. In the case of general obligation bonds, districts receive upfront project proceeds while district taxpayers repay the principal and interest of the debt over time.
Capital Markets Are Reactionary
The capital markets are very reactionary to the stream of national and international headlines. When fear or uncertainty grips the markets, a “flight to quality” shift in investments typically occurs. Missile strikes create uncertainty, uncertainty moves investments from stocks to bonds, bond demand results in lower interest rates. This is a global economy in which events taxpayers cannot control impact the very costs these taxpayers pay.
In May 2017, we worked on a bond financing for a school district in the Central Valley. This school district was issuing bonds for the construction of educational facilities with the debt to be repaid by taxes levied primarily on single family residences, agricultural and industrial properties.
General Obligation Bonds Are Considered Safe Haven Investments
In the evening prior to the scheduled morning bond sale, the New York Times reported the existence of memos in which the former Director of the F.B.I. detailed his conversations with the President. The memos allegedly document the President’s attempt to influence an ongoing investigation. The prospect of obstruction of justice charges and the impeachment of the President created fear in the market. The stock market declined the next day and bond interest rates declined significantly as far as one-day moves are concerned.
As general obligation bonds are considered safe haven investments, the school district’s bond sale saw significant investor orders flow in which resulted in excess demand and even lower interest rates. The homeowners and farmers of this community thus benefited from the chaos created by this news bombshell.