New municipal issuance should rebound next year, given low interest rates, pent-up demand for projects, and improved finances among states and localities, market observers with the Bond Dealers of America said Tuesday.
“I think the demand is there, particularly for munis with a well-defined revenue stream,” said Mark Vitner, managing director and senior economist at Wells Fargo Securities LLC in Charlotte, N.C.
“As worries subside about state finances, the demand for general obligation issues should be pretty strong.”
Vitner’s remarks came at the Bond Dealers of America’s press conference here for its semiannual economic survey of members’ economists.
They expect the economy to grow 2% in 2012 and 2.7% in the first half of 2013, and for the unemployment rate to average 9% in 2012 and 8.8% in the first half of 2013.
The BDA polled 10 member firms during the third week of October for its survey.
As for municipal securities, the survey said the market had recovered from turmoil and uncertainty “real and imagined” earlier this year, especially concerns about defaults.
But respondents were “evenly split” about whether muni yields relative to Treasuries would widen or narrow, the survey said.
In general, though, the economists forged a “strong consensus” for a spike in 2012 municipal offerings, with 88% of survey participants predicting “higher volumes in the coming year,” the BDA said.
Vitner and Steven Cochrane, managing director at Moody’s Analytics in West Chester, Pa., who helped prepare the survey, cited several key factors driving the improved prospects for new muni issuance.
State finances have stabilized, driven by spending reductions and boosts in sales tax revenues, Vitner said.
States and localities have trimmed expenditures by 2.3% in 2011, with spending expected to dip 1.5% in 2013, he said.
Interest rates remain low, he noted, and participating economists said they expected rates to stay low into 2013.
In addition, municipalities and states face a backlog of projects that need to be done, he said.
“Ultimately, governments have to start meeting needs,” Cochrane added.
Survey respondents said states with the most severe housing market downturns would face the most significant budget challenges in 2013, including California, Arizona, Nevada and Illinois.
North Dakota and Wyoming, by contrast, which are benefiting from energy exploration and high oil prices, have the strongest fiscal outlooks, the survey found.
The BDA did not ask participants to quantify or predict a specific volume, or percentage increase, they expected for new issuance in 2012.
Still, the economists’ positive outlook on munis was key, according to Vitner.
“My gut instinct tells me it will be a fairly significant increase,” he said.
Separately, survey respondents said they expect all regions of the country will see modest improvements in economic conditions during the next six months.
In particular, they looked for gains in retails sales and commercial real estate and modest gains in manufacturing. They also expected employment to rise slightly in every region except the Northeast, where they predicted flat job growth.
“It shouldn’t be news to anyone that economic growth is slow and is likely to remain slow for some time,” Vitner said.
