Sell Side

Muni Volume So Far Is About Half 2010's

Municipal bond issuance remains about half of what it was last year, with volume for the first six months down almost 44%.

Monthly Volume

However, it may pick up in the second half of the year, analysts said, with June down only about 10% from last year, hinting the market may be turning around.

Issuance in June was down 9.2%, with $31.5 billion of new debt coming to market, compared to $34.7 billion in June 2010, making it the largest month of issuance this year.

“The market has been expecting this increase in issuance to some degree, and given the performance, I think we have been looking forward to it,” said Peter Hayes, head of municipals at BlackRock, adding that the market had an easy time digesting supply.

“So where do we go from here? We will probably see a bit of an increase over the next six months but not significant enough to dramatically affect the market,” Hayes said.

He added that issuance will likely come in just below 50% of 2010, which in itself implies there will be an uptick for the second half of the year.

Other analysts agree. “Issuance should pick up slightly in the second half of the year, but not by much,” said Tom Kozlik, municipal credit analyst at Janney Capital Markets. “That begs the question of what will happen in 2012, and when will issuance come back?”

Kozlik added that 2012 will likely be as lackluster as 2011, but “as the economy picks up and issuers break out of shells they are in, issuance should pick back up again in 2013.”

For 2011, Janney analysts estimate about $250 billion in total issuance; about $115 billion has come to market for the first half. The first half of 2010 saw $205 billion of new debt. Issuance in the first half of the year is the smallest first-half volume since 2000 when it was $96.5 billion. June issuance was the lowest since June 2001, when it was $30.9 billion.

Negotiated issuance suffered more than the competitive market, and was down 48.5% for the first six months, while competitive issuance was down about a quarter. For June, negotiated issuance was down 13% to $24.5 billion, and competitive issuance was up over 6%, with $6.7 billion coming to market.

Keeping with the traditional trend, New York and California nabbed the top two spots for the most debt issuance, with $14 billion and $12.7 billion coming to market in the first half of the year, respectively. They are down 23.7% and 58% from the first half of 2010 when California grabbed the top spot.

Texas beat out Illinois for third place, issuing almost $10 billion so far in 2011. It is down over 33% from 2010, when it was in fourth place. Illinois issued $7.2 billion of new debt, down over 53% from last year.

“The biggest story this year is issuance in the municipal market,” said Troy Willis, senior portfolio manager at OppenheimerFunds’ Rochester municipal group.

“As there were no big issues in the first half of the year and outflows in the retail municipal space continued, the lack of issuance has been a huge help to munis,” Willis said, adding that the slim amount of supply has contributed immensely to firming up the market.

And unlike past years, there were fewer big deals that came to market in June. The largest deal was the only one that broke the $1 billion mark, with Los Angeles issuing $1.2 billion of general obligation bonds.

The second largest deal was a $996.5 million GO offering from Georgia, followed by the New York Tobacco Settlement Finance Corp. issuing $959.2 million of general purpose bonds.

Rounding out the top five was a $900 million issue from Florida’s Citizens Property Insurance Corp. and $694 million of debt from the Los Angeles Department of Water and Power.

Even with the top 10 deals coming above the $600 million mark, new-money bonds suffered more than refundings. New money was down 48.4% for the first six months of the year, with $64.7 billion coming to market compared to last year’s $125.5 billion. For June, new money was down just over 17%, with $18 billion ­coming to market versus last June’s $21.6 billion.

Refunding bonds fared a little better, but were still down for the first half of the year compared to last year. BlackRock’s Hayes said the reinvestment period was somewhat muted in June but July and August could improve.

“It was highly publicized coming in, with implications that there would be good price performance,” Hayes said. “Munis were the best performing of all fixed-income asset classes, so in this risk-off trade, munis have held well.”

Refunding bonds were down 33.7% for the first half, with $32 billion coming to market versus the $48.4 billion that was issued last year. For June, refundings were up from last year. June saw $7.7 billion come to market, up 5% from last year’s $7.3 billion.

“Politically, issuers do not want to be issuing new debt right now, and this political environment could last several more years,” Willis said. But with the summer reinvestment period coming up, new issuance will be welcome by many in the muni market.

Most classes of borrowers saw declines in June, especially counties and parishes that were down over 57% for June compared to last year. State governments were down only 3.2% for June, issuing $2.5 billion compared to $2.6 billion last June. State agencies issued $9.61 billion this June, down 0.1% from last June when they borrowed $9.62 billion. Cities and towns were up 1.2% this June, issuing $5.47 billion, versus $5.41 billion last year.

However, all sizes of borrowers were down around 50% for all six months compared to the same period last year.

Education, the largest sector by issuance, saw $34 billion of bonds so far this year, down 28.4% from last year’s $48.6 billion. For June, education bonds were up 31%. General purpose bonds, which were down 46.2% for the first half of the year, were down only 22.5% from June 2010.

Transportation bonds were still down by over half from the first six months of 2010 at $11.6 billion, versus $26 billion last year, but were down only about 37% in June at $3 billion, versus $4.7 billion in June 2010. And while electric power is down 70% for first-half 2011, it is up 95% from June of last year at $2.2 billion, versus $1.1 billion in June 2010.

One explanation might be that the first half of the year saw demand for higher-yielding bonds, BlackRock’s Hayes said.

“The triple-A, high-quality, less-yielding bonds were less interesting, especially the latter half of the period,” he said. “Credits such as revenue stream bonds did well. Anything with some type of credit spread continues to do well and that will continue over the next couple of months.”

“We have seen issuance fall below long-term averages before: issuance slowed in 1987, after a big run-up in 1985 because of the 1986 tax act. Issuance slowed again in 1994 and 1995, and then again in 2000 and 2001,” Janney’s Kozlik said. “This is not an unprecedented phenomenon. And we will likely start trending higher again.”


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