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A Rash of Refundings Helps Push Volume Up 44% From a Year Ago

The municipal market for the month of February continued its upswing in new issuance of long-term bonds from one year earlier.

Monthly Tables

Primary market volume shot up 44.2% last month from February 2011 numbers, a period that saw abnormally low issuance.

This year, February witnessed $23.84 billion of long-term bonds issued on 905 deals, compared with $16.54 billion on 589 issues a year earlier, according to Thomson Reuters data.

An extended “January effect” of low primary volume and high demand due to lots of reinvestment cash gave way to more and larger issuance around the middle of last month.

Three deals of $1 billion or more, a sizeable bump in refundings as well as large gains in education, transportation and utilities issuance marked the February calendar.

Around this time in 2011, however, the market cut a ragged figure: interest rates were much higher, demand was low, calls for fiscal austerity were deafening, and outflows from muni bond mutual funds continued apace.

For the past month, though, the increase in refundings, up almost 170% last month from the same period one year earlier, caught the attention of Richard Ciccarone, chief research officer at McDonnell Investment Management.

Volume levels for the month approximated those of February in 2008 and 2009. But refundings had a lot to do with the increase this year, he said.

“One of the reasons why we couldn’t do them was, looking at the yields, there was such negative arbitrage there for quite a while — and there’s still is some negative arbitrage,” Ciccarone said.

“But the level of interest rates during the month was so low that it allowed the math to work, that you could do a refunding,” he added.

Among the different muni sectors, utilities and transportation experienced the largest increases in volume.

Utilities issuance leapt 406% for February year-over-year, to $3.93 billion from $776 million. Transportation rose about 142%, to almost $2.2 billion from $909.7 million.

The largest sectors, general purpose and education, had a mixed month. General purpose bond issuance fell 8% from February 2011, while education volume climbed 81%.

Overall tax-exempt issuance increased 80% last month over that of a year earlier, at $20.62 billion from $11.46 billion in February 2011.

By comparison, taxable issuance fell 43% in February from a year ago, to $2.75 billion from $4.82 billion.

Revenue bonds rose 77% in February over the same period last year, to $13.39 billion from $7.57 billion. General obligation issuance increased 16.6% last month over February 2011, to $10.45 billion against $8.97 billion.

Bond-insured volume jumped 53% from February 2011, to $1.13 billion on 125 issues from $740 million on 71 issues.

Among municipalities, colleges and universities, cities and towns, and districts saw the largest jumps last month. Colleges and universities were up 222% February-over-February, to $2.38 billion from $738 million.

Bond issuance by cities and towns in February rose 204% over the same month a year earlier, to $3.47 billion from $1.14 billion. Districts jumped 164% from a year earlier, to $5.68 billion from $2.15 billion.

State governments saw a 68% decline over the period, as issuance collapsed to $1.71 billion last month from $5.33 billion one year earlier.

Local authorities experienced a 2.1% decline in volume.

For the year to date, muni volume is up about 42%. There’s been $41.1 billion total issued this year on 1,611 deals. That compares with roughly $29 billion on 1,088 issues for early 2011.

Again, the number of refundings is up significantly so far in 2012. They’ve jumped 160.5%, representing $18.9 billion, against just $7.25 billion over the first two months of 2011.

New-money deals, for their part, have fallen 6.6% through the same period, to $17.2 billion from $18.4 billion through February 2011.

State issuance changed rather dramatically for the first two months of 2012 over the same period one year earlier. A rare $3.7 billion GO offering gave Illinois the top spot through February 2011. For the past two months, it fell 61.7% to ninth.

Texas has motored its way to first so far this year from fifth over the same period in 2011. It’s issued $4.19 billion in long-term bonds on 156 issues. That compared to $2.14 billion on 109 issues, a 95.6% increase.

The Golden State followed Texas. California notched $3.94 billion over the last two months on 87 deals, a 35.8% increase. Through last February, California ranked third on almost $2.90 billion from 72 issues.

New York traded places with California, placing third through this February and falling one spot from one year earlier. The Empire State saw $3.85 billion in issuance on 91 deals for the first two months, compared with $3.67 billion through February 2011 on 68 issues.

Rounding out the top five for 2012, Puerto Rico placed fourth on almost $3.10 billion in bonds, after ranking 18 through February 2011, a 768% leap.

Washington moved up one spot over the year, to fifth, on almost $2.80 billion in issuance.

Colorado saw the largest jump through February year-over-year, up 2,904%. The state climbed to seventh place from 40th through February 2011.

Deals from Puerto Rico claimed the first- and third-largest places last month. Those from New York ranked as the second and fifth largest.

The Puerto Rico Aqueduct and Sewer Authority weighed in with the largest deal, at $1.80 billion. New York City GOs followed at $1.03 billion.

The Puerto Rico Government Development Bank issued $1 billion of taxable general purpose credits, marking the third bond to reach the plateau for the month.

February saw more of the large issuers emerge from the January effect, according to Natalie Cohen, a managing director in municipal securities research at Wells Fargo Securities.

“We’re starting to see a pick-up of some of the largest issuers,” she said. “Money is in the market looking for deployment. The large issuers that were quieter last year on the whole, such as Puerto Rico, those names are coming back in. It makes sense, given the low rates and obviously high demand for munis.”

The numbers this past month, however, do not include roughly $2.35 billion of California bonds in the negotiated market that were expected to come to market after press time on Wednesday.

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