Sell Side

September Saw Muni Volume Rise by 3.6%

Municipal market issuance volume grew 3.6% in September from the same month a year ago. The advance followed a slow August in which monthly volume fell by more than one-fifth despite record low yields for borrowers.

Total volume was $31 billion in September, according to preliminary data from Thomson Reuters.

“Clearly, low rates are having an effect,” said John Hallacy, director of municipal research at Bank of America Merrill Lynch. He noted that sectors sensitive to market rates, such as utilities, are taking advantage of low rates to sell long-dated debt.

Third-quarter issuance fell despite yields falling across the curve, declining 3.1% from a year ago to $89.6 billion. Total year-to-date issuance still rose 1.8% to $294.2 billion.

Much of the borrowing occurred early in the year, with January volume increasing 41% to $32.7 billion and March volume advancing 15% to $44.4 billion, relative to the same periods a year before. Issuance in the first quarter surged 22.2% to $104.3 billion from the same period of 2009, while second-quarter volume fell 9.7% to $100.4 billion.

From the end of the first quarter to late September, the two-year yield fell 36 basis points to 0.43%, the 10-year yield declined 75 basis points to 2.34%, and the 30-year yield fell 45 basis points to 3.72%, according to Municipal Market Data.

With tax-exempt yields low and the outlook for Build America Bonds uncertain, Hallacy said issuers are eager to access the market after a slow summer.

Tax-exempts have strengthened as BABs have siphoned supply from the market and risk-adverse investors have traded in equities for bonds in a flight-to-quality strategy, according to analysts from UBS Financial Services.

“Despite the deterioration in municipal credit fundamentals, the market remains supported by several technical factors including the prospect of higher tax rates, favorable supply/demand dynamics and ratings recalibrations,” they wrote Thursday in a 28-page UBS report.

The uptick in issuance beginning after Labor Day is anticipated to continue in the coming three months, particularly among issuers taking advantage of BABs before the program expires or the 35% interest rate subsidy is reduced at the end of 2010.

Institutional investors may be less enthusiastic about purchasing BABs if they are uncertain the program will be extended, according to strategists at Janney Capital Markets.

“Although it has grown rapidly, a market capped at $150 billion or so, with little prospect of additional issuance, would be of minimal interest to large investors going forward,” the Janney strategists wrote in a monthly research note.

More BAB issuance means less tax-exempt supply, and that should put pressure on tax-exempt yields. The pressure should be more pronounced for longer issues, where the program is most popular and offers the most savings. UBS analysts note that just 13% of BAB issuance is issued inside of 12 years.

Value among 30-year tax-exempts is already clear, as triple-A munis ­currently offer an equivalent yield to 30-year ­Treasuries. Ten-year tax-exempts offer 94% of the comparable Treasury yield, ­according to MMD.

Thanks to the success of BABs, taxable borrowings continue to account for about one-third of monthly issuance. September issuance included $9.9 billion of taxable bonds — with $8.2 billion of BABs — a 32% share. That’s one-fifth more BABs than in September 2009.

Tax-exempt issuance totaled $20.7 billion last month, or 3.9% less.

New-money issuance was fairly steady at $19.2 billion compared to the previous September. Meanwhile, refunding issuance soared 37% to $10.1 billion. That surge is yet another sign that issuers are taking advantage of low yields, according to Rice Financial’s Howard Mackey, who said refundings “don’t take a lot of preparation.”

Year to date there has been $197.4 billion of tax-exempt issuance and $93.5 billion of taxable issuance, reflecting market shares of 67% and 31.8%. The remaining $3.4 billion of deals were minimum tax bonds — bonds not subject to the alternative minimum tax — which have doubled in volume so far this year.

Bond insurance continued to play a minor role in the new-issue market. Assured Guaranty Ltd., the only guarantor wrapping new debt, insured 142 issues totaling $1.85 billion last month, or 6% of all new issues. Year to date, bond insurance totaled $20.6 billion, which is 32% lower than the same period a year ago.

While the private bond insurance industry continues to struggle with just one active player, other state-supported guarantees are playing a more significant role securing new debt.

These “other guarantees” insured 137 deals last month worth $2.3 billion — outpacing the private insurance market for the third month this year.

This indicates highly-rated issuers ­seeking credit enhancement may be finding it easier to work with state guarantors than the private sector, Mackey said.


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