The municipal-bond market will continue to experience record-low interest rates in the first half of 2012, followed by higher yields if the Federal Reserve implements a third round of asset purchases known as quantitative easing, said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion in bonds.
He was interviewed at Deutsche Bank’s midtown office for today’s issue of the Bloomberg Brief: Municipal Market newsletter.
Q: What do you forecast for municipal-bond supply in 2012?
A: About $340 billion, or about a 10 percent increase from this year. That’s due to rates remaining low, so you’ll see more refinancing. That has been the big increase in 2011. And then you’ll see some more capital projects getting financed with low interest rates.
I’ve always said that capital financing of projects is a good way to boost the local economy, so if you’re running for re-election, why not build something? That’s what they’ve all done in the past, dating back to the pharaohs.
Q: What revenue bonds do you like?
A: I love special-tax bonds. They don’t go through the general operating fund of the municipality, so it removes the risks of the operations of the municipality, like possible downgrades or headline risk. And the coverage ratios are huge.
States like Illinois, New York and California have these. Certain localities have it, like Washington D.C., New York City, and even Puerto Rico has a sales-tax bond. It’s great. I couldn’t get enough. And it’s triple tax-exempt. So I like these a lot.
Certainly I like water, sewer and electricity. Residents have to pay -- otherwise they don’t get their service. And during tough economic times, it’s a pretty inelastic demand.
Q: What universities do you like, and what were your thoughts on century-bond sales this year?
A: In higher education, I like the larger universities and colleges. Century bonds are a great from the issuer’s point of view. But do you want to buy a 100-year bond when interest rates are at their lowest level in the past 100 years? I wouldn’t do that as an investor, but from their point of view, it’s great.
I’m sure there’s some pension fund out there that needs a long-term liability who will match that with this asset. The duration of a 100-year bond is not that much different than a duration of a 30-year bond when you start to discount it.
Q: Do you like both public and private universities?
A: Yes I do. I like public ones like Michigan, Texas and Cal. And the private ones, I like the 50 best schools in the United States, just because of the natural demand to go there, both here in the U.S. and internationally. They really have a monopoly on higher-education services, and it’s price-inelastic.
Q: Would you look at bonds like Detroit’s water system?
A: I tell my clients when we look at an essential-service bond, we still look at the geographic and underlying economic base of the issuer. If I don’t like that, I’m not going to buy the water and sewer bond.
Now that might be foolish, but from a client point of view it shows a conservative nature that we’re not going to take undue risks, and that there’s plenty of other essential-service revenue bonds I can buy.