Low Interest Rates Spur Bond Issuance

Corporations and municipalities took advantage of low interest rates in the first quarter to issue nearly $310 billion in new debt, Thomson Financial Securities Data said Thursday.

Issuance of new U.S. municipal bonds rose to the third-highest quarterly volume on record, as struggling states and local governments borrowed to make up for depleted tax revenue, the market data provider said.

Long-term municipal bond issuance jumped to $64.7 billion in the first quarter, an 11% increase from the year-earlier period.

“We have more budgetary problems, and you saw more issuance to bridge budget gaps,” said Cadmus Hicks, a municipal market strategist with Nuveen Investments in Chicago.

Adjusting for tax law changes and inflation, state tax collections shrank by 4% between October and December, according to the latest data from the Nelson A. Rockefeller Institute of Government at the State University of New York in Albany.

At the same time, interest rates in the municipal market hit near-record lows late last year, leading more municipalities to put bond deals in the works so they could take advantage of low yields.

Companies, meanwhile, confounded forecasters by selling more debt than expected in the first quarter: $245 billion.

Bond traders originally had predicted that companies would delay many bond deals as they waited for another rate cut by the Federal Reserve. “You had the expectation going into the year that the Fed may have one more easing in it,” said Jim Merli, global head of the fixed-income syndicate at Lehman Bros. Inc.

As economic data pointed to surprising strength, and market interest rates began to rise in the first quarter, many companies decided to borrow rather than wait and face potentially higher rates later this year.

Investor nervousness about unsecured short-term corporate debt in the aftermath of the bankruptcies of Enron Corp., Global Crossing Ltd. and other firms also pushed more firms to borrow via secured bonds.

The overall pace of corporate bond issuance is slightly above the pace set in 2001, when $818 billion of corporate debt was sold, and just above the $242.2billion sold in the first quarter of 2001.

Citigroup Inc.’s Salomon Smith Barney unit, Credit Suisse Group Inc.’s Credit Suisse First Boston unit and Merrill Lynch & Co.--respectively, the top investment-grade, “junk” and convertible securities underwriters in 2001--held on to their leads in the first quarter.

Jeff Kane, managing director at Banc of America Securities, said that if interest rates remain stable in the next several weeks, “we may see issuance front-end-loaded in the second quarter, but it’s still too early to tell.”

Exchanges Set Timetable for Options Linkage

The five U.S. exchanges that trade options securities have agreed on a timetable for permanently linking their markets to ensure that investors get the best prices, regulators said Thursday.

Under the timetable, testing of the electronic linkages would start in early December. The plan sets Feb. 1 as the date by which a first phase of the intermarket linkage would be implemented and April 30 for a second and final phase.

“The options intermarket linkage is an important step in improving options customers’ ability to receive the best prices available,” the Securities and Exchange Commission said.

An option is a right to buy or sell a specific type of assets--such as stocks, bonds and currencies--at a set price within a preset time period. An option holder is not obligated to exercise the option to buy or sell before it expires.

The heads of the exchanges proposed the timetable to the SEC this year only after much prodding by regulators. The exchanges already have had a one-year reprieve from implementing the electronic linkage ordered in October 1999 by the market-regulating SEC under then-Chairman Arthur Levitt Jr.

The market regulator said that unless an exchange participates in a linkage, customers must be told when options orders are executed at prices inferior to the best published prices.

The five exchanges are the Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Exchange and International Securities Exchange.

Reuters