Agenda - Council - 01/13/1981 - Laserfiche WebLink

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" A~[] EVENSEN..DODGE, INC. [,11] Public Finance and Management \/-NEWSLETTER January 1981 e-I 1fJ . 1900 Midwest Plaza Building, Minneapolis, Minnesota 55402 612/338-3535 800/328-8200 Outside Minnesota \ The Municipal Market Record rates in th e pub 1 i c sector are keeping local government issuers out of the market at a time when i nfl ati onary pressures are making it very difficult to operate local government. Those ~cal governments having to enter ~pital markets due to previous commitments and cash flow needs paid up to 9% for long term funds and up to 10% for short term funds in December of 1980. The housing mortgage revenue bond financing volume, anticipated as a result of the time constraints of new restrictive legislation effective January 1. 1981, was also held in check tit the record interest rates. The market, as measured by the Bond Buyers Index, established records of 5.74% in 1934, ,7.12% in 1970, 7.57% in 1975, 9.44% in March of 1980 and 10.56% in December of 1980. Graphically the nuni ci pal market represents a stai rcase effect since the 1940's with only occasional interruptions for the new records. The record interest rates are caused by i nfl at i on and cont i nued concern of investors over failure to control it. Previous optimistic estimates that the long term annual rate of inflation would be brought under control at the 4% to 6% 1 eve 1 have gi ven way to a feel i ng that 8% to 10% would be more real istic and that inflation will be with us for some time. Efforts by the Federal Reserve to control the money supply have also contributed to higher rates. While local government is practicing fiscal restraint and loan demand is drying up at local lending institutions, the market is being fueled by the tremendous demand of the Federal government to fund its deficit financing and the funding . needs of major business. .. . Recently the market has posted gains. The rally seems spurred by reports that ~he Reagan administration is considering calling for an economic emergency action and a feeling by some investors that interest rates have peaked. Present changes in interest rates are influenced by the market's perception of the new administration's ability to control the economy. Whether the improvement will be temporary or a trend will depend on actual improvement in the economy. This will require constructive programs that are effective and cooperation from the Federal government, local government, business and labor, and that is not an easy task. I