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Volume Dives 28% in October

Long-term municipal bond volume for October trailed 2012 issuance for the third straight month, much as it has throughout the year.

Volume last month fell 28% over the same period in 2012, to $25.4 billion in 755 deals against $35.1 billion in 1,112 issues. The declines reflect a steep drop in refunding deals and local governments' use of increased revenues to shore up reserves rather than start much-needed infrastructure projects. For the year to date, issuance has dropped 14%, to $275.7 billion on 9,560 deals, compared with $319.1 billion in 10,955 issues through October 2012.

Given the general improvement in state and local economies, and the end to the government shutdown, industry watchers expected a rise in volume for the rest of October. "It is lower than anyone had expected it to be," said Eric Friedland, head of municipal credit research at Schroders Investment Management.

"Even though there has been general economic recovery and local and state governments are getting more revenues this year than they have before, there's still a spirit of fiscal austerity. There's a lot of political pressure government leaders are facing that prevents them from issuing a lot of debt."

There's also an impression that local governments have already issued too much debt and that they need to cut back and replenish reserves, he added. But low volume actually could be perceived as constructive, given the persistent outflows from muni bond funds.

"It's keeping spreads tight and prices higher," Friedland said. "Significantly more issuance would put a lot more pressure on muni prices."

Refunding volume tumbled 57% last month, to $5.7 billion in 225 deals from $13.2 billion in 521 issues one year earlier. For the year to date, refundings have dropped 31%, to $93.9 billion in 3,766 deals from $135.7 billion in 5,253 issues.

"You're also not seeing much refunding volume now," Friedland said. "With the negative arbitrage, advanced refundings don't work so much."

New money issuance increased 17% in October, to $15.2 billion in 464 deals from about $13.0 billion in 471 issues. Through the first 10 months of the year, new money climbed 9%, to almost $128 billion in 4,868 issues from $117.8 billion in 4,683 deals.

Issuance dropped for most of the largest market sectors last month. Education fell 38%. Health care, transportation and utilities had declines of 43%, 38% and 62%, respectively. Only general-purpose volume rose over the period, at just 4%.

For the year to date, issuance in health care, transportation, utilities and general purpose decreased by 28%, 7%, 30% and 23%, respectively. Education has seen a 1% increase over that span.

Tax-exempt volume fell 29% in October, to $22.5 billion from $31.4 billion. Taxable volume, though, has plummeted 37%, to about $2.0 billion from $3.2 billion.

Negotiated issuance dropped 28% last month, to $19.8 billion. Competitive volume slid 18% to $5.2 billion.

Revenue deals plummeted 42% in October to about $14.0 billion. General obligation issuance rose 6%, to $11.5 billion.

While fixed-rate issuance collapsed 31% last month, variable-rate short put volume climbed 5%; and long- or no-put variable-rate issuance rose 36%.

Negative numbers abounded among the largest state and local government issuers for the month of October. Issuance by state agencies last month free-fell 50%, to $6.3 billion. Cities and towns saw issuance tumble 33%, to $4.2 billion.

Meanwhile, districts floated 42% less in debt last month, to $2.8 billion from $4.8 billion. Local authorities issued 44% less volume in October, to $3.3 billion.

Volume's trajectory is not about to spike in the near future, either, said Duane McAllister, co-manager of the BMO intermediate tax free fund at BMO Global Asset Management U.S.

"Take all of that, and we're likely to see moderate volume that's not likely to pick up too much," McAllister said.

"We may see a little more, as yields have fallen here since early September. But I don't know that we're going to get a significant pick-up anytime soon."

Not only has volume shrunk year-over-year, but so, too, has the number of deals. Bonds have arrived similar in size to what the market has seen in recent years, McAllister added, just fewer of them.

California issuers, who have boosted volume by 13%, led all states. The Golden State floated $41.9 billion in 682 deals through October, against $37.1 billion in 617 issues this time last year, when it placed second.

Texas moved up one spot to the runner-up slot, despite issuing 2% less than one year earlier. Lone Star State issuers floated $29.4 billion in 1,138 deals, versus $30.1 billion in 1,103 issues through October 2012.

New York dropped two positions, slipping to third on 36% less in volume. The Empire State issued $27.4 billion in 592 deals, compared with about $43 billion in 766 issues last year.

Issuers in Florida and New Jersey closed out the top five states. The Sunshine State moved up one spot to fourth place floating 14% less in par amount than at this time in 2012, at $12.1 billion in 204 deals against $14.1 billion in 192 issues.

New Jersey issuers jumped six spots to fifth place from October 2012 on a 33% increase in volume. The Garden State floated $11.4 billion in 238 deals, versus $8.6 billion in 340 issues last year.

A $2.1 billion deal for new money and refunding California GOs on Oct. 22 stood as the largest issue last month, and represented one of just two to top $1 billion.

A multi-purpose $1.1 billion taxable and tax-exempt deal from the New York City Transitional Finance Authority followed. It priced on October 24 in both the competitive and negotiated markets.

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