In the Midst of Ongoing Market Volatility, Find Certainty with Fixed Rate Reinvestment
- Georgina Walleshauser
- May 29
- 3 min read
May 29, 2025 | Georgina Walleshauser, Vice President
The tax-exempt bond market has been, and continues to be, extremely volatile.
From one week to the next, borrowers may find that the indicative savings on their upcoming current refunding have diminished, or their estimated par amount for new money projects has increased beyond their expectations. Due to interest rate and credit spread volatility, deals may be delayed from coming to market and borrowers may face narrower options for investing their proceeds.
In recent weeks and months, we’ve assisted many borrowers and issuers with navigating some of these challenges through the reinvestment of bond proceeds. Below we describe some themes we’re seeing in this challenging market and examples of how alternative reinvestment structures can be a useful tool.
Market Theme: Delayed Refunding Transactions Resulting in <30 Day Escrows
Reinvestment Approach: Open Market Securities ("OMS") Refunding Escrows
While we aren’t seeing OMS outperforming State and Local Government Securities (SLGS) often in the current market (although possible, depending on the structure and eligible securities), there is one instance where they are guaranteed to be more optimal: when an escrow is under 30 days.
If an escrow is under 30 days, there is no fixed-rate SLGS to invest in other than a zero-coupon SLGS. For escrows of substantial size, even this short period can provide significant earnings because of elevated short-term rates in the current market.
We recently bid an OMS escrow that was only 28 days in length and locked in over $200k net earnings for the borrower. A SLGS escrow would’ve earned $0.
If market volatility or other circumstances causes your refunding transaction to be delayed, and you are planning to escrow bond proceeds for less than 30 days, we are ready to act quickly and on short notice to bid OMS and help you avoid a total loss of escrow earnings.
Market Theme: Increased Interest Rates Reduce Bond Premium (Or Increase Issue Discount) for Anticipated New Money Borrowings
Reinvestment Approach: Net Funded Investments with Fixed Interest Rates
We’ve seen dramatic increases in benchmark interest rates caused by market reactions to news related to tariff policies, Fed sentiments, and Moody’s downgrade of the U.S. Treasury Rating, just to name a few recent examples. In addition, we’ve seen investors demanding higher credit spreads for tax-exempt borrowers and issuers that are negatively impacted by policies outlined in proposed tax reform policies.
Higher yields reduce the amount of bond premium that is applied towards a transaction. Even higher-rated institutions are seeing yields creep up to almost 5%, which is the standard coupon rate on most tax-exempt bonds. Lower rated issuers and borrowers may be required to issue discount bonds when market yields are above coupon rates, which can increase the par amount required to fund projects above the estimated project cost. As a result, new money borrowings are requiring a higher par amount and some borrowers and issuers may become concerned about their debt capacity, or the amount of debt that they are authorized to issue.
By locking in a fixed-rate investment product for their bond proceeds, borrowers and issuers can borrow only for the required amount of the investment and have certainty that the earnings will be sufficient to cover the remainder of their estimated project costs (and capitalized interest payments if applicable). We’ve recently bid both OMS laddered portfolios and Guaranteed Investment Contracts (“GICs”) for net-funded project funds and capitalized interest funds that have lowered our client’s borrowing amount by $900k-$2.4M.
We encourage you, as always, to reach out to your Blue Rose advisor for an indicative escrow cash flow analysis and/or indicative reinvestment rates for your funds. We welcome the opportunity to discuss available structuring options and answer any questions related to our bidding agent services.
Georgina Walleshauser, Vice President | 952-746-6036
In her role of Vice President, Georgina Walleshauser manages a number of the firm’s clients, providing them with advice on and ensuring a smooth closing for all types of debt and derivative product transactions, capital planning solutions, and detailed credit assessments. Ms. Walleshauser serves as an advisor to public and private higher education, non-profit and governmental institutions. She specializes in analyzing and assessing reinvestment strategies for clients, leading most of Blue Rose’s reinvestment transactions. Ms. Walleshauser has vast expertise in providing modeling, analytics, market data, and research in support of the delivery of capital planning, debt and derivatives advisory, and reinvestment services to our clients. She joined Blue Rose in 2017 as a Junior Quantitative Analyst.
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