He said he’s been told to expect a “shock” when the rate resets on his agency’s bonds, whose interest payments are about $4 million a year. A 1 percentage point increase in its interest rate would increase costs by about $350,000 a month, he said.
The higher rates are “real money,” said Mayhew.
The sell-off is coming just as banks’ inventories of the securities usually swell around this time of the year as Americans sell them in order to pay their tax bills. Lind, the Neuberger Berman portfolio manager, said the financial market havoc has created a “perfect storm” that’s giving banks a strong incentive to increase the interest rates to lure buyers back.
“Whoever can set their rates the cheapest is most likely going to be sitting on less inventory between now and tax time,” he said.
Abrupt Shift
The Memphis health care system is among the dozens that have been affected. Bonds issued by the state of Oregon issued for veteran’s projects were reset to yield 5% on Wednesday, up from 1.92% on Monday. Bonds issued for an art museum in Kansas City, Missouri, which had to shut its doors until April due to the coronavirus, also saw its bonds reset to 5%, up from 1.92% on Monday.
The tax-time uptick in yields is usually a short-lived phenomenon, and this time may be no different. But it’s an abrupt shift for borrowers that had been paying near zero interest rates for years.
Mayhew joked that he would consider buying his tolling agency’s debt because the shift higher in yields if likely to be short lived.
“I don’t think we’re going to hate the whole market if we get a couple of bad months,” Mayhew said.
This article was provided by Bloomberg News.