DALLAS — If volume in January was any indication, it’s going to be a lean year for new issuance in the Southwest.
With sales of new bonds down more than 50% in January and a mood of austerity gripping state capitols, local bond experts are also gauging investor sentiment and being cautious in their advice to issuers.
“It’s the fifth straight month we’re going into a sell-off,” noted Jeffrey Timlin, portfolio manager and vice president of Sage Advisory Services in Austin. “Because of supply and demand factors, when you see the net cash outflows, you probably have a lot of underwriters saying right now is not the best time coming to market.”
Since mid-November, nervous individual investors have withdrawn more than $31 billion from muni bond mutual funds — about 6.2% of total fund assets of $500 billion, according to industry officials.
Many of those individual investors, alarmed by headline risk and warnings of potential defaults, were new to the often arcane practices of municipal bonds.
“It’s the typical cycle of retail investors putting money in at the wrong time and taking money out at the wrong time,” Timlin said.
The rush to issue federally subsidized Build America Bonds before the program expired Dec. 31 also created a vacuum in the first month of 2011, Timlin noted.
“Like 0% financing for cars, it pulled things forward,” he said.
Hill Feinberg, chairman and chief executive of First Southwest Co., agreed that the rush to capture the BAB subsidy drew volume away from the first of the year. Now, governments are dealing with uncertainty, he said.
“All municipal governments are evaluating their positions on budgets, spending, appraisals and where the tax revenues are,” he said. “Rates have moved dramatically up in yield, and people are stepping back to evaluate if this is a long-term trend or an aberration.”
While the January volume drop of 52% in the Southwest appears severe, it is less than the 66% national decline to $11.1 billion.
In 2010, the eight states in the Southwest issued $3.14 billion in January. That compares with $1.5 billion last month.
Volume is expected to pick up nationally, but not come close to last year’s issuance of $426 billion. Loop Capital Markets forecasts $375 billion in new issuance for 2011, a 12% decrease from 2010’s volume, according to strategist Chris Mier.
Texas made up the lion’s share of the issuance with $747 million last month compared to $1.8 billion in January 2010, a decline of more than 57%.
The Texas issues were unusually small, with only one issue of $100 million or more. The Texas Public Finance Authority, one of the largest issuers of state general obligation debt, priced only $31.5 million in January.
Like five other states in the region, Texas has a Republican governor, Rick Perry, who has shaped his agenda for the current legislative session around Tea Party priorities such as immigration enforcement and voter identification. Neither Perry nor lawmakers in the overwhelmingly Republican Legislature have said much about the state’s projected $27 billion revenue shortfall, other than the committing to no tax hikes.
To reduce spending, lawmakers are seen as unlikely to increase debt service or propose any major new outlays for projects.
Arizona, one of the most conservative states in the region, issued $730 million of certificates of participation in January of 2010 to raise revenue for operations. The COPs effectively mortgaged state buildings — including those in the capitol complex — for short-term needs. Last month, issues throughout the state totaled only $278 million, a decrease of 66% over the same month in 2010.
Some states saw an increase over a very small base in 2010. Colorado’s volume rose 141% to $63 million. New Mexico’s rose 74% to $185 million.
Meanwhile, Arkansas’ volume fell 100% to 0 from $102 million in 2010. Oklahoma’s fell 15% to $133 million. Ever-frugal Utah issued only $67 million, a decline of 41% from January 2010.
About 63% of the change in muni volume on a period-over-period basis can be statistically attributed to changes in interest rates, according to Mier. Low interest rates have contributed to high new issue volumes in the last six years.
“We expect that improving economic conditions will result in a slightly higher trading range for the 10-year Treasury note,” Mier wrote in a recent report. “The effect of slightly higher interest rates is to depress volume.”
The money that left the muni market over the past three months has migrated to various new investments. Some, sensing a bull market in stocks, have shifted to equities.
Since President Obama took office in 2009, the Standard & Poor’s 500 index of stocks has risen more than 60%. Others chasing higher returns are going to high-yield funds and emerging markets, according to Timlin.
Americans pumped a net $3.76 billion into domestic stock mutual funds in the seven days ended Jan. 12, the biggest weekly inflow since May 2009, according to the Investment Company Institute.
Recent warnings of impending bankruptcies of state and local governments have also caused alarm among individual investors, though industry officials say those concerns are overblown.
FMSbonds in January took out a full page advertisement in the Wall Street Journal challenging the “steady drumbeat … predicting a muni market meltdown.”
Still, the threat of downgrades hangs over the market.
Fitch Ratings notes that during the fourth quarter of 2010 and for the eighth consecutive quarter, U.S. public finance rating downgrades outnumbered upgrades.
“This trend in public finance ratings is expected to continue as negative rating outlooks exceeded positive rating outlooks and negative rating watches still outweighed positive rating watches in the fourth quarter,” the agency reported.
For companies advising municipalities or underwriting issues, the fall in volume portends some frugal budgeting.
“We have been tightening our belt,” Feinberg said. “We have been careful about adding people. Our head count is not up, but it is stable.”
