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Munis Down By Half

Long-term municipal bond issuance is half of what it was a year ago, with volume down 51% through the end of May versus the same time last year.

Monthly Tables

Roughly $83.7 billion of new debt has come to market so far this year, less than half of the $170 billion priced over the first five months of 2010, according to data from Thomson Reuters.

Volume for the first five months of the year is the lowest it’s been since 2000, when $73.07 billion of bonds were issued. It is also the first time since 2000 that yearly volume has not reached $100 billion through May.

Debt issuance last month was hardly what it was last May, with $21 billion coming to market, down 45.4% from the $38 billion that was issued in May 2010.

While issuance in May was the highest of any month thus far in 2011, the total is still lower than any month in 2009 or 2010. It also marked the lowest May volume since 2000, when it was $15.96 billion.

“Now that we find ourselves almost halfway through 2011, most municipal new-issue primary market volume predictions are proving to be overestimated and recent lower than typical volume has created a troubling atmosphere for investors looking for new issue buying opportunities,” Tom Kozlik, municipal credit analyst at Janney Capital Markets, said in a monthly bond market column.

Expected annual volume was slashed several times to an estimated $250 billion, down from a typical year of $400 billion.

Chris Mier, managing director at Loop Capital, said low volume could be here to stay, at least for the next several years. “It’s appropriate to be worried about low issuance for no other reason than this business has typically been built around volume between $350 to $425 billion for a decade,” he said.

“This low issuance points to a powerful dynamic where the political benefit of offering infrastructure projects has completely reversed,” Mier said. “Five years ago, it might have been favorably received to issue bonds for an infrastructure project. But at the moment, taxpayers want very conservative financial management.”

Mier added that volume may not jump back to the normal $400 billion range immediately. “How long will this period of low issuance last? It could last the balance of this year and all of 2012 until the election. Maybe this year it will be $250 billion, and next year $275 billion, but it will not return to $425 billion right away.”

Negotiated issuance suffered the most, with $62.9 billion coming to market, down more than 55% from the $141 billion in negotiated deals that came to market during the first five months last year. Competitive deals were down almost 32% to $19.4 billion so far this year.

Not surprisingly, New York, California, and Illinois were the top three issuing states, respectively, with $9 billion, $7.5 billion, and $6.8 billion coming to market. While those three also nabbed the top spots through May of last year, all figures were down significantly.

New York was down almost 38% from this time last year when it was the second biggest issuer; California fell more than 70%, when it was the largest; and Illinois was down 48% from 2010’s third-place spot.

May’s issuance was comprised of several $500 million and $600 million deals.

The Puerto Rico Government Development Bank issued $650 million, followed by New Jersey Transportation Trust Fund Authority and the Virginia Transportation Board, each issuing $600 million. The North Carolina State Education Assistance Authority and Massachusetts issued $516 million and $470 million of debt, respectively.

Despite these relatively large issues, new-money bonds fell 44.5% to $12 billion for May when compared to last year, while refunding fell 32.7% to $5.7 billion over the same time period.

Declines were seen from all sizes of borrowers. The $2.3 billion of state government issuance last month was down almost 40% from May 2010. State agency issuance fell almost 60% to $6 billion, issuance from counties and parishes fell 27.3% to $1.3 billion, and city and town issuance was down 34% to $2.6 billion.

Sector-specific issuance fell dramatically as well, with education falling almost 28% to $6.5 billion and general purpose bonds falling 38.8% to $5.8 billion for May this year versus last year. Health care and transportation also fell, dropping 35% to $2.6 billion and 57.4% to $2 billion, respectively, over the same span. While May was slow, some experts say issuance in the second half of the year should pick up.

“Coming into June the technicals should be supportive of a strong municipal market,” said Alan Schankel, managing director at Janney. Beyond June, “we expect new-issue supply to build, as most states and many other issuers enter new fiscal years with new borrowing needs. New-issue volume will not approach the record months of last year, but we will see acceleration as we head into the third quarter.”

Mier agrees, and at least for this year, expects an increase in the second half. “It’s a typical pattern to see more issuance in the second half of the year,” he said.

Others expect to see a slight increase sooner than the third quarter.

“The start of June has typically been weak for municipal bonds,” said Anthony Valeri of LPL Financial. “However, demand has traditionally increased starting in mid-June and carried through the end of July.” He said there is a large slate of maturing bonds, leading to reinvestment demand that may bolster the market.

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