As rates tumble, firms and homeowners benefit Refinancing trims costs, fuels growth

February 26, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Starting Monday, the effects of the bond market's recent rally will come home to Capitol College in Laurel. That is when the small engineering college will take advantage of the rally to refinance its debt, slicing its interest payments by more than half.

"It will mean big savings for us," said Rick Veenstra, the college's chief financial officer. "We were paying about $500,000, and now, payments will be under $200,000."

The cut has been made possible by the bond market rally, which has pushed long-term interest rates to their lowest levels in 20 years. The chief indicator, the 30-year Treasury bond, has dropped to record lows in recent days. And with rates down, colleges aren't the only ones taking advantage of cheap debt.

Homeowners have been flocking to refinance mortgages, and governments and businesses are saving millions of dollars by restructuring debt.

Indeed, the corporate bond market was flooded with $5.8 billion of new issues yesterday. So far this week, corporate issues worth $12.5 billion have been sold on the bond market, exceeding the previous weekly record of $9.6 billion.

"Any time you can cut interest rates, you're going to save," said Mickey Levy, chief economist for CRT Government Securities Ltd. "That goes for the government, as well as for individual households and companies."

For the economy, lower mortgage rates put extra income in consumers' pockets and mean more spending. In addition, corporate bonds carry lower rates. These savings translate into improved profits, so more workers can be hired, and new equipment can be bought.

The savings could produce a $90 billion stimulus for the economy, including an annual savings for corporations of $7.5 billion, according to Moody's Investors Service.

The downside to the lower rates is not as dramatic but is bound to pinch millions of Americans living on fixed incomes. Bonds and certificates of deposit once offered a safe source of 8 percent or 9 percent interest. They now pay only 5 percent to 6 percent.

The rates have been cut because bond investors see President Clinton's plans to cut the federal budget deficit as anti-inflationary.

In turn, investors reason that the budget-cutting will keep the rates of today's bonds attractive and worth more in the future. Assuming that the deficit shrinks, the government would issue fewer bonds, thus competing for less capital in the marketplace and easing upward pressure on interest rates.

The government's 30-year bond closed yesterday at 6.89 percent, aslight increase over Tuesday's record low of 6.82 percent but still far lower than the 7.61 percent yield available when Mr. Clinton was elected.

A big winner in the rally is the federal government itself, which will save in interest charges, thanks to the lower rates.

For individuals, mortgage rates have dropped, to 7.6 percent last week, from about 8 percent around the end of last year, said David Lereah, chief economist for the Mortgage Bankers Association.

In Maryland, the rate is even lower, with Chip Reichhart at Maryland National Mortgage Corp. estimating that a 30-year mortgage is now at about 7.25. "Interest in refinancing is not as high as last year but has grown steadily in recent weeks," Mr. Reichhart said.

The reason for the renewed interest is clear: For someone with a $100,000 loan who is paying an 8 percent mortgage, a refinancing to the new rates could trim monthly payments from $733 to $699, for about $350 in savings annually.

For those who hold mortgages of about 9 percent but haven't bothered to refinance, the savings could top $1,000 a year.

Businesses stand to save even more, with several announcing repayment of debt issued at higher rates, and the issuing of new debt at lower rates.

Baltimore Gas & Electric Co., for example, is refinancing a $75 million bond, originally due in 2004, by issuing new bonds. The utility's savings could reach $1 million a year.

Cities, counties and states are getting in on the act, with Baltimore considering a refinancing of its general obligation bonds. Anne Arundel County will call $20 million of its bonds next month -- 20 years early.

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