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Muni Bond Issuance Drops 31% in November

Long-term municipal bond volume continued to trail last year’s pace as issuers sold 31.3% less in November than they did during the same period last year.

Monthly Data

Municipalities brought 771 issues totaling $23.2 billion to market during the month, compared with 1,163 issues totaling $33.8 billion in 2012, according to Thomson Reuters data.

“It’s pretty consistent with what we’ve been witnessing since May, which is simply a rate-driven collapse in refunding volume,” said John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management. “In fact, unless U.S. economic data falters materially in the near term, we would expect significant year-over-year issuance declines right through April due to challenging comparisons.”

Year-over-year issuance has declined every month this year since May, with the exception of July. The year started with a 54% increase in January, followed by slight declines in February and March, and a 9% increase in April.

Early year over year comparisons in the first few months of 2014 will be challenging due to the stronger issuance seen in early 2013.

For the year to date, issuance has fallen 14.7% to $301 billion in 10,401 deals. That compares to $352.9 billion in 12,118 deals last year.

“Miller Tabak Asset Management sees long-term municipal bond volume remaining on the low side as municipalities’ ability to refinance their debt diminishes as interest rates have risen this past year,” said Michael Pietronico, chief executive officer at Miller Tabak.

Refunding deals continued to tumble during November, dropping 77.1% from last year. Issuers floated 214 refunding deals, worth a total of $3.3 billion, compared to $14.5 billion last year.

For the year to date, refunding issuance has dropped 34.7% to $98.1 billion. Last year, refundings reached $150.2 billion.

“Municipalities also seem to be cautious in adding new debt as the economic recovery remains tepid and uneven,” Pietronico said. “Also many of the largest borrowers such as Illinois and Puerto Rico have been on high alert for potential downgrades, which keeps the wraps on any issuance they may be considering that might seem proliferate in any way to the rating agencies.”

New money issuance for November increased 25.9% from last year, with 502 issues totaling $16.2 billion. For the year to date, new money has gone up a slight 11.2% to $145.3 billion, from $130.7 billion last year.

Issuance dropped in every market sector in November, except for development, which saw an 897.6% increase to 33 issues totaling $983.6 million. Among the largest sectors, issuance dropped 45.3% in education, 10.5% in utilities, and 3% in transportation. General purpose issuance dropped 39.1%.

For the year to date, issuance in education, utilities, transportation, and general purpose dropped 2.9%, 27.5%, 3.6%, and 24.8%, respectively.

Tax-exempt volume fell 27.5% in November, to $20.3 billion from $28 billion last year. Taxable volume took a steeper decline of 63.6% to $1.3 billion.

Negotiated issuance declined 29.8% to $18.9 billion last month, and competitive deals dropped 27.6% to $4.3 billion.

Issuance of revenue bonds also took a decline of 37.5% to $14.8 billion, and general obligation bond issuance fell 16.5% to $8.4 billion.

The bond insurance industry was one of the few sectors that has benefited from a rise in interest rates. The par amount of insured issuances increased by 39.1% during the month to 88 deals totaling $1.5 billion, compared with 110 deals totaling $1 billion last year.

“I think it was possibly helped by the recent value-added perception from bond insurance regarding Puerto Rico exposures,” Dillon said. “Granted, for the year to date they’re still lower, but that number is consistent with the rest of the market.”

For the year to date, bond insurance has declined by 14.4% from last year, which compares to the entire market decline of 14.7%.

Fixed rate volume dropped 34.7% in November. Variable-rate short-put issuance slowed 17.5%, while variable-rate long- or no-put soared 237.7% to $666.7 million.

State and local issuers alike scaled back on bond deals during the month. State government issuance dropped 7.5% to $3.4 billion and state agency issuance dropped 28.6% to $7.2 billion.

Cities and towns issued $2.4 billion of debt, compared to $3 billion last year. Issuance from districts dropped 44% to $3.4 billion, and local authorities dropped 42.6% to $3.2 billion.

Among the states, California is the top issuer of debt, with $44.9 billion issued so far this year. That amount is up 13.6% from last year’s $39.5 billion of debt sold through November.

New York is in second place with $31 billion—a 31.8% decline from last year’s $45.5 billion. Texas takes third place with $31 billion, followed by Florida with $12.595 billion and New Jersey with $12.585 billion.

Next year, issuance could turn negative at times, with more bonds maturing or getting called than being issued, according to Roberto Roffo, senior vice president and portfolio manager at Advisors Asset Management.

“With the general consensus that rates are going to go higher, and all the redemption in the muni world, it’s all coming together to form a perfect storm,” Roffo said. “It has really cut down on the strong demand we’ve seen in the prior years.”

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