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New Issuance Dips 4.9% in February

New-issue volume fell 4.9% in February from a year earlier, but remains up 5% for the first two months of the year as the municipal market continues to see conditions more favorable than the ones that squeezed it beginning last September.

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A total of 678 new issues with a par value of $20.3 billion came to market in February, down from 778 issues with a par value of $21.4 billion in February 2008. Through the first two months of the year, a total of $43.6 billion of bonds have come to the market compared to $41.6 billion in 2008, when concerns about the bond insurers hit the market.

"While [the market] is not by any means normalized by historical standards, nevertheless the liquidity exists to bring a reasonable and regular amount of issuance," said Philip Fischer, fixed-income strategist at Banc of America Securities-Merrill Lynch Research.

Data suggests the municipal market is both feeling the impact of the economic downturn and reacting to the stimulus that is attempting to fix it. A recent National League of Cities survey found that 84% of cities responding reported facing fiscal difficulties, the highest percentage since the survey began in 1985.

The use of general purpose bonds increased 23.7% in February as 176 issues with a par value of $5.1 billion came to market. General purpose bonds are up 27% for the year, which suggest issuers facing budgetary difficulties are using debt financing to help keep up their employment numbers, Fischer said.

Issues of general obligation bonds, however, fell 21.8% in February with 465 issues coming to market with a par value of $8.8 billion. This could mean that issuers were waiting for more clarity on the stimulus package before entering the market.

"We would expect whatever deferred issuance had occurred waiting for the stimulus package, that paper will now come and that number will recover," Fischer said.

In the health care sector, 31 new issues with a par value of $2.2 billion came to market in February, an increase 26.2%, as issuers tried to sort out problems with existing variable-rate demand obligations. Overall, refundings increased 37.1% to $4.85 billion and letters of credit use grew 41.4% to $2.45 billion.

"This stuff all relates to cleaning up the VRDO market," Fischer said. "The VRDO market is materially better than it has been in months."

Overall, the municipal market rallied into February, and The Bond Buyer 40 index rose to 104-28 on Feb. 12 from 101-21 on Jan. 30, posting gains every day. The index began the year at 99-09.

With investors skittish about the stock market and yields high relative to Treasuries, the high-grade muni market looked attractive, according to Alan Greco, executive managing director of sales and trading at Depfa First Albany Securities LLC, which Jefferies Group Inc. has agreed to acquire. Retail investors had a strong appetite, and mutual funds, which had seen weeks of outflows amid the credit crunch last fall, now had week after week of inflows.

However, investor demand has pulled back with absolute yields on high-grade credits now very low. In addition, although ratios compared to Treasuries are now historically high - the ratio of a 30-year, triple-A GO bond to a 30-year Treasury sat at 132.05% Thursday, according to Municipal Market Data - they are much lower than the highs of nearly 209% reached before a municipal rally began in mid-December of last year.

The Bond Buyer 40 has fallen to 103-20 since hitting 104-28 on Feb. 12.

Still, the market is attractive for issuers that can come to market. Although the yield on a 10-year, triple-A GO has risen to 3.08% from 2.84% on Feb. 12, according to MMD, it still remains well below the five-year historical average of 3.74%

"If I was an issuer I would try to issue as much as I can, if at all possible inside of 10 years, just to get these absolute low levels and not worry about 'Well, normally these bonds just trade 20 over,' " Greco said. " Let's do it 40 over and just get it done, because rates are going to back up. If they're capable of coming to market they should do it."

In addition, the market is still showing other signs of stress. The volume of competitive deals continues to fall, with overall issuance down 34.4% this year. The size of the average competitive sale has fallen 24% to $15.3 million.

In addition, the difference between the highest grade, most liquid credits and all other debt persists. The spread between a triple-A 30-year GO and a Baa-rated, 30-year GO stood at 230 basis points on Thursday compared to 79 basis points a year earlier, according to MMD.

"The better credits had reasonable liquidity and solid demand, but credit spreads widened out, so anything even A-rated with insurance seemed to get cheaper or experienced illiquidity," said Evan Rourke, vice president and portfolio manager at Eaton Vance.

"You have to look at the credit spectrum," he said. "The whole market, with the demise of bond insurance, has just become way more credit sensitive. And not just credit sensitive, but credit specific."

 

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