Fed’s Twist May Squeeze More Savings For Newtown

By John Voket

The same federal financial program that should lower bonding expenses for rebuilding New York’s World Trade Center site is expected to contribute to around $900,000 in savings when Newtown re-funds a 2004 package of municipal bonds next March.

According to Newtown Finance Director Robert Tait, Operation Twist, a Federal Reserve strategy of selling short-term treasury holdings and purchasing longer-term treasuries in an effort to lower long-term borrowing rates, may further nudge down the interest rate Newtown is expected to pay on the re-funding.

“Twist could add further incremental savings to the re-funding,” Mr Tait told The Bee September 26, the day before the Port Authority of New York and New Jersey began selling $1 billion in 40-year bonds to fund construction at the World Trade Center site, according to numerous financial industry reports.

The falling Treasury rates, which act as a benchmark to municipal bonds, are making borrowing in the bond markets less expensive, and the action is also expected to cause municipal bonds that are already outstanding to rise in value.

Businessinsider.com also reported that bond investors are attracted to municipal issues because they offer a more attractive return than Treasuries.

Since Operation Twist will lower rates that municipal bond issuers will pay to raise new money, Mr Tait said it makes even more sense to re-fund higher interest bonds that he previously believed were financed at the lowest rate possible.

“Since our 2004 re-funding issue becomes callable — [meaning] we can pay it off — in March, we expect to re-fund, or reissue, the bonds at added savings,” Mr Tait said. “We may save more than $900,000 over a two- to three-year period.”

Board of Finance Chairman John Kortze said the discovery of further savings was made after he asked Mr Tait about the opportunities to refinance the 2004 issue within a policy criteria established locally.

“There is a cost to refinance, and after factoring that cost there is potentially $900,000 in savings,” Mr Kortze said. “If today’s scenario holds through March, it would certainly qualify under our policy to re-fund these bonds again,”.

The finance board chairman noted that market conditions may change, but he has never seen the Fed say they will keep rates this low for a set period of time — in this case through 2013.

“So we see a different perspective in the market,” Mr Kortze said. “If the Fed is going to bring longer term yields down, longer-term municipals are going to come down as well, which makes it advantageous for Newtown to re-fund.”