Governments have ridden the wave of low interest rates, which have kept borrowing costs low and saved taxpayers money. But the Federal Reserve has signaled that it will soon curb the stimulus program aimed at holding down long-term rates. That has already pushed municipal and other bond rates higher, meaning higher costs for state and local governments. Colin MacNaught, Massachusetts’ assistant state treasurer of debt management, recently spoke with Globe reporter Deirdre Fernandes about navigating financial markets in a new era of higher interest rates.
Investors, banks, and even insurance companies have complained about the low interest rate environment cutting into profits. But explain how Massachusetts has benefited?
It’s probably saved taxpayers hundreds of millions of dollars, and it has allowed us to invest in and rehab hundreds of roads, hundreds of bridges all across the Commonwealth. It will benefit Massachusetts residents for generations.
As interest rates rise, how is Massachusetts positioning itself to ensure that it gets the best rates for the debt that it issues?
Our borrowing needs have not gone away. Rates have risen. Our number one challenge is to maintain the high credit quality that we have achieved to date. If we were to fall, we’d be paying hundreds of millions of dollars more in additional borrowing costs. Number two is to do a better job talking to investors.
How does Massachusetts stand out with investors?
We are a state with a lot of long-term liabilities, pension liabilities, debt liabilities, retiree health benefits, so it’s incumbent on us to focus on the long-term financial stability of the state. The state has undertaken multiple rounds of pension reform. There is a bill that is set to be heard by the Legislature on retiree health benefit reform. On a pure dollar basis, we think we have the third-highest reserves in the country.
What has the state learned from the recent financial crisis?
Individual credit matters. Also, we are much more diversified today than we were five or six years ago.
How have you diversified?
Our biggest push has been on the retail side. If we rely less on Wall Street, I think we’ll be better off in the long run. When we go to sell bonds, we will sell and structure bonds to make them specifically attractive to retail investors. We in the past have sold bonds in smaller denominations.
Was the issuance of green bonds recently an attempt at diversification?
These are projects we were going to fund anyway. During the retail period, we received 40 orders for one bond. We’ve never seen that before.
Is it an issue of a lot of institutions having metrics that they’re trying to meet in terms of sustainability?
There’s a lot of money flowing into the sustainable investment space and a lot of big institutional investors have mandates — a certain portion of their investments have to be in sustainable investments. You see that with a lot of endowments and pension funds.
Are you seeing any fallout from Detroit’s recent bankruptcy and the shaky finances of major cities such as Chicago and Philadelphia?
I don’t think so for Massachusetts. There’s clearly a backlash on the local level for the state of Michigan.
A former Goldman Sachs investment banker was recently hit with a $100,000 fine in a pay-to-play scheme that involved the previous state treasurer. Is there more that needs to be done as far as regulations to ensure greater transparency and prevent abuses in the government bond industry?
The Municipal Securities Rulemaking Board has taken steps to prohibit [investment] bankers from contributing [to campaigns]. The steps [that regulators] have taken have been really prudent to the long term efficiency of the market.