Sell Side

Volume Dips 46% In April

Long-term municipal bond issuance remains extremely light so far in 2011, down 53% through the end of April versus the same period last year.

Long-Term Bond Sales: January - April

Roughly $62 billion of new debt has come to market so far this year, less than half of the  $132 billion of new issuance over the same period in 2010, according to data from Thomson Reuters.

Last month’s bond issuance did not fare much better. Issuance was down over 46% from April 2010, with only $14.7 billion of new debt, compared to $27.5 billion the year before.

Consequently, many analysts are revising estimates for volume projection for 2011. Christopher Ryon, portfolio manager at Santa Fe, N.M.-based Thornburg Investment Management, said he expects municipal bond volume to be anywhere from $200 billion to $250 billion this year.

Earlier in the year, many market participants were estimating volume at much higher levels.

In a March research note, Chris Mauro, head of U.S. muni strategies at RBC Capital Markets, wrote that he had revised his volume projection to $310 billion from $360 billion in December. Then, last week, Mauro revised his projections again.

“The trend of anaemic municipal new issue volume has continued into April, causing us to reduce our forecast of 2011 volume once again,” he said. “Given current trends we anticipate issuance of $250 billion to $260 billion in 2011, but caution this figure could prove overly optimistic if volume doesn’t pick up once state budget season concludes this summer.”

Mauro added that as fiscal 2012 state budgets get finalized between now and June 30, “issuance should increase from current low levels. However, should supply continue to languish after the conclusion of the current state budget season, it’s possible that pure tax-exempt volume in 2011 could come in as low as $210 billion.”

April saw  the second-lowest issuance total thus far this year, slightly higher than January’s $12.5 billion. Low volume in both months is typical.

“Issuance in April is very low,” says Alan Schankel, director of fixed-income research at Janney Capital Markets. “But once we get past budget season around June, administrators, governors, and mayors will know what they are working with and will have a plan and can implement borrowing plans. So we may see a pickup in issuance because of that.”

Schankel added that with rates falling, there may be a potential for additional refinancing.

“All in all, we’re going to see an improvement in volume as the year goes by, but it will not approach last year’s lofty $430 billion,” he said.

New York, Illinois, and California remained the top three issuing states again this year with $7.7 billion, $6.1 billion, and $5.4 billion of new debt coming to market, respectively. However, those numbers are significantly down from 2010.

California is down over 70% from last year, when it was the top issuer in the first four months with $19.2 billion. Illinois, which was the second highest issuer through April 2010, is down over 50%; it had issued over $12 billion of new debt by this time last year. New York, which nabbed the top spot this year, is still down over 17% from last year, when the state issued $9.3 billion.

 Some of the biggest deals to make headlines this month were the North Texas Tollway Authority and Chicago’s O’Hare International Airport issuing about $1.1 billion and $1 billion of new debt, respectively, and only a week apart. They were by far the two biggest deals. The New York City Transitional Finance Authority came in third with almost $650 million of new-money bonds in the first week of April.

These big deals, however, were not enough to make up for lost time. In April, refunding fell 39% to $5.2 billion from last April and new issuance fell over 48% to $7.8 billion.

Declines in volume were also seen from all sizes of borrowers. In April, issuance from state governments fell over 71% to $644 million, while borrowing from state agencies fell over 60% to $3.3 billion. New debt from counties and parishes fell 62% to $757 million while issuance from cities and towns fell over 15% to $3.6 billion.

Most issuance sectors dropped as well. Education fell 50% to $4.3 billion in April, while general purpose issuance declined 39% to $2.9 billion. Transportation was about the same as April of last year, slipping only 0.5% to $3.1 billion. Health care issuance fell almost 23% to $2 billion.

Despite low volume, the yield environment is favorable to borrowers. As of Friday, the triple-A rated 10-year bond had fallen 13 straight days to reach 2.85%, according to Municipal Market Data. By contrast, in January of this year, 10-year yields reached a 24-month high of 3.46%.


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