GFOA Investment Training in Columbus

GFOA will be offering its core training on investment of public funds in Columbus, Ohio, on April 20 and 21. The course will be led by veteran instructors Ned Connolly, vice president of Chandler Asset Management, Inc., and Corinne Larson, vice president of MBIA Asset Management Group. They will be joined by Susan Flischel, president of Seasongood Asset Management, which is based in Ohio. For additional information about the seminar, refer to GFOA's Web site. For Ohio local investment officials, the seminar may also fulfill the CPE credit requirement mandated by the State of Ohio. For additional information about the CPE requirement, refer to the Ohio Treasurer of State, Center for Public Investment Management (614/728-4236 or 800/ 228-1102).

Free Pricing Service for Municipal, Corporate Bonds Goes Online

In February, The Bond Market Association (TBMA) announced that its investor education website, InvestinginBonds.com, has begun providing near-realtime pricing information on corporate bonds. The action mirrors an effort to provide electronic publishing of prices of municipal bonds.

TBMA is publishing the data through an agreement with the National Association of Securities Dealers, which provides the information through its Trade Reporting and Compliance Engine (TRACE). The scope of the corporate securities includes: all retail trades, all investment grade trades and all but the least liquid trades of non-investment grade issues.

Real-Time Pricing for Munis Now in Effect

On January 31, the Securities and Exchange Commission announced a new system for providing investors nearly instantaneous or real-time pricing of municipal bonds. In prepared remarks, SEC Chairman William Donaldson said it “is an historic moment for all municipal bond investors. For the first time, investors will have ready access to real-time price data for municipal securities.” In their role as bond issuers, governments may have an indirect interest in the new pricing mechanism, and will be directly affected when acting as a bond buyer—specifically, when purchasing taxable municipal securities for short-term portfolios or longer-term pension portfolios (where allowed by investment policy).

The SEC stated that as of January 31, brokers, dealers, and municipal securities dealers must report transactions in municipal securities to the Municipal Securities Rulemaking Board's Real-Time Transaction Reporting System (RTRS) within 15 minutes of the time of trade execution. Upon receipt of the transaction data, RTRS will immediately perform automated error checking and electronically disseminate prices, providing the municipal securities market with near real-time transaction price transparency for the first time. The previous requirement was reporting by midnight on the day of the trade.

The SEC foresees three major benefits from the new pricing system:

• More efficient pricing—Informa-tion relevant to the value of municipal securities should be incorporated more quickly and reliably into transaction prices. Near real-time price transparency should increase confidence that the best market price for specific securities has been located.
• Greater confidence—For both institutional and retail investors, the open availability of market prices should instill greater confidence that pricing mechanisms in the market are fair, open, and efficient.
• Better oversight—The new RTRS facility will enhance the surveillance database and audit trail of transaction data used by enforcement agencies like the SEC.

The Bond Market Association has agreed to make this municipal bond trade information freely available to all investors on its Web site at www.investinginbonds.com. Through a searchable database, investors will be able to view municipal bonds by state, credit rating, or maturity. They can also view detailed information about a particular security’s insurance coverage, rating, and call date, as well as its daily high and low prices and its yield-to-maturity.

Bush Budget Continues Deficits, Limits SEC Funding for FY06

As Congress settles into the 109th Congress, a flurry of activity has emerged about the President's FY06 budget proposal. While discretionary spending was kept to a 2 percent annual increase—below the rate of inflation—many in Congress remain concerned about the impact the growing deficit will have on economic trends in the future.

Apart from the deficit, its economic impact, and the continued issuance of Treasury securities to finance deficits, many treasurers and finance officers are concerned about the dramatic cuts that will be imposed upon local and state governments. These include cuts and new restrictions for Medicaid programs, a 25 percent decrease in funds for first responder programs, and severe cuts and reorganization of community block grant programs.

The budget of the Securities and Exchange Commission will see no dramatic increase in funds while the workload of the commission has increased over the past few years. The proposed funding level is $864 million. The SEC is expected to collect $2.1 billion in revenues from fees on stock transactions, but must remit $1.3 billion of the revenues to the federal government's general fund. Funding for the Public Company Accounting Oversight Board, which came to fruition out of the Sarbanes-Oxley Act of 2002, will work from a budget of $137 million from fees paid by accounting firms and public companies.

Another item of interest that is heating up again for the eighth year, is bankruptcy reform. On February 17, the Senate Judiciary Committee voted out of committee a bankruptcy reform bill. Congressional leaders believe that, finally, this year the reform measures will be approved by Congress and signed by the President. The reform measures would give local governments a higher priority in their ability to receive payments for delinquent taxes, as well as protect a person's public pension assets from bankruptcy creditors.

While the budget outlines some reform to the Federal Deposit Insurance Corporation (FDIC), namely to merge the two deposit insurance funds, it does not discuss raising the FDIC insurance limits for individuals or local governments.

Banking Survey Shows Impact of Check 21

Treasury & Risk Management’s recent banking survey shows that the new Check 21 law that just took effect late last year is having important repercussions among bank customers. In terms of greatest benefits, Check 21 is expected to result in faster availability — i.e., bank’s ability to process more checks electronically will allow them to pass on efficiencies to customers—according to 50 percent of those surveyed. Relatively few cited the following as benefits: better pricing; enhanced disaster recovery, reduced transportation costs, or consolidation of banking relationships. The survey was conducted of small- to mid-sized corporations for the February 2005 issue.

The biggest Check 21 challenge? There will be costs associated with implementing the high-volume imaging technology needed to put Check 21 into effect. Additionally, the survey found that most businesses, like most governments, do not change banking relationships often: 48 percent indicated they have never put their banking services services out to bid, or do so every five-plus years. Forty-nine percent do bidding on a two- to five-year time frame, and only 3 percent do so annually.

Panel of Economists

Economists Opine on Decline in Long-Term Rates

Despite widespread expectations that long-term interest rates would rise over the last 12 months, the 10-year Treasury bond has returned to the level it was at a year ago. This month, Public Investor asked its panel of economists what the primary causes are behind the lower long-term interest rates. We also asked the panel if long-term interest rates are likely to remain low or rise.

Carl Tannenbaum states that the leading reason for persistently low long-term rates is strong demand for fixed income securities among international and domestic investors. Even so, he expects that long-term rates will rise in the future due to the lower U.S. dollar, large budget and trade deficits, and somewhat higher levels of inflation.

Dr. Lacy Hunt highlights three factors behind the decline in long-term interest rates. First, there is increased demand for long duration assets by private pension funds. He notes that private pension funds have held insufficient long duration assets. The Pension Benefit Guarantee Corporation has already taken steps to match assets with liabilities. Second, there are numerous signs that U.S. economic growth will slow enough to moderate inflationary pressures. He notes that vehicle sales dropped to a 16.2 million annual rate, which is down from the average selling rate in the fourth quarter. A third factor behind the decline in long-term rates is investor confidence that the Fed will be successful in reigning in future inflation. Hunt expects the trend toward lower long-term bond yields to continue.

According to Peter Kretzmer, the primary causes of lower long-term interest rates are slower-than-expected employment growth, a decline in energy prices, and previously overblown fears of accelerating inflation. Kretzmer states that long-term interest rates are more likely to rise as the economic expansion continues.

John Silvia cited foreign central bank intervention as a primary cause behind the lower long-term interest rates. He expects long-term rates to rise from current levels, but remain low relative to recent history.

Modest Growth, Modest Inflation Continue

The latest economic data continue to show moderate economic growth and low inflation. Looking ahead, many economists expect the solid economic growth to continue through the first half of the year. The Conference Board’s consumer confidence index increased for the second consecutive month after a string of declines. The unemployment rate declined to 5.2 percent in January; however, the most recent employment growth data were lower than expected.

The databank’s average money market fund maturity statistic is at 36 days, which is an unusually short maturity. The average maturity over the past ten years has been around 50 days. This may be a signal that short-term interest rates are rising. In general, money market fund managers tend to decrease their average maturity when they expect short-term interest rates to rise.

RGM

No Surprises as Fed Continues Rate Hikes

As expected, the Federal Reserve Open Market Committee decided to raise the Fed Funds rate by 25 basis points at its most recent meeting on February 2. The Fed noted that inflation is still “well contained and low interest rates are still “providing ongoing support to economic activity.”

The Fed Funds futures market predicts that the Fed will raise the Fed Funds rate by 25 basis points at its next meeting on March 22. Many Fed watchers expect that the Fed will continue its “measured” pace of 25 basis point rate increases culminating in a 3.5 percent rate by the end of the year.

The yield curve has flattened in recent months as the Fed has raised short-term rates and long-term rates have declined. Recently, the spread between the 10-year Treasury note and the two-month Treasury bill has shrunk to about 75 basis points, the smallest spread since March 2001. Usually, a flat yield curve suggests slower economic growth. An inverted yield curve, where short-term rates are higher than long-term rates, is a reliable signal of a future recession. However, in the current environment, many economists think the flatter yield curve reflects expectations for low long-term inflation.

RGM

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The Public Investor is published monthly by the Government Finance Officers Association (GFOA), 203 N. LaSalle Street, Suite 2700, Chicago, IL 60601. (312/977-9700; email: PublicInvestor@gfoa.org) Annual subscription rates are $55 for active GFOA members, $70 for associate GFOA members, and $85 for nonmembers. For reprint permission contact GFOA.

The information and opinions printed herein are from sources believed to be reliable, but GFOA makes no guarantee of accuracy. Opinions, forecasts and recommendations are offered by individuals and do not represent official GFOA policy positions. Nothing herein should be construed as a specific recommendation to buy or sell a financial security.