Volume Sank Further in May

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Issuance declined 5.8% in May from April's already low levels, defying analysts' predictions supply would pick up further into the second quarter.

Market Data

May's long term municipal bond volume totaled $24.51 billion, from $26.03 billion in April. May's supply is 19% below volume for same the month in 2013, according to Thomson Reuters' data.

"The expectation, historically speaking, is that issuance picks up in the second quarter of the year in part because lots of issues have these maturities and or coupon payment dates of June 1, June 30, July 1 or July 30," Jim Colby, chief municipal strategist at Van Eck Global, said in an interview. "It stands to reason in a very fundamental analysis to expect to see more issuance arrive, and it hasn't."

Volume this year has remained far below 2013's levels, totaling $113.31 billion as of May 30, compared with $153.03 billion for the same period last year, according to The Bond Buyer and Ipreo data.

Colby says that supply might be low this election year, as politicians may be reluctant to add to a municipality's debt.

"I think it is possible elections play into it," Colby said. Municipalities will not issue debt "if political entities in power say they don't want to incur the wrath of constituency."

Jim Grabovac, managing director and senior portfolio manager at McDonnell Investment Management, said that not borrowing and not investing is "in vogue."

"That has been the sentiment on a medium term basis over recent years coming out of the recession," he said. "And orientation toward fiscal austerity has been present not only domestically, but in developed markets in Europe as well."

Dawn Mangerson, managing director and senior portfolio manager at McDonnell Investment Management, said in an interview that some municipalities are still strained because, while the economy has improved this year, it is not expanding at a rapid rate.

The gross domestic product number released on Thursday was revised to negative 1%, from a positive 0.1%.

"If we see a bigger GDP number there might be more willingness to spend," she said.

Colby also theorized that the current economic uncertainty might play into municipalities' choice not to issue debt.

"It's a head-scratcher," he said. "Whether it's an economic reason, a political one, or a combination of both. It might be the inability of Congress to move forward on legislation. [The low supply] has an aura about it that suggests complacency at state and local level with regards of accessing the capital markets."

General obligation issuance decreased by 35% last month from May 2013 with GOs only accounting for $8.32 billion in volume.

Market participants are saying that while market technicals will keep demand strong for any issuance that comes to market, investors are looking to alternatives to GOs because state and local bonds have been priced so rich this year.

"Investors are not looking at GOs as much not only because they are rich, but because of diversification as well," Fred Bacani, head of fixed income and trading at Veritable LP in Newtown Square, Pa., said in an interview. "Particularly, essential-service bonds are in demand due to ongoing pension woes of states and local governments."

Bacani said that a strategy his group has adopted is to look at bonds other than typical GO bonds issued by popular states.

"There is some value in subordination — not necessarily buying state GOs, but purchasing certificates of participation," he said.

Supply in most sectors fell from May 2013. Education issuance dropped 33%, to $7.2 billion from $10.8 billion in May last year. Electric and power deal volume plunged 23% to $688.5 million.

"Power would be a nice area to see more supply." Mangerson said.

Transportation did increase in May 2014 from the same month in 2013, growing by 62% to $6.29 billion in issuance.

Market participants attributed the gain to the New Jersey Turnpike Authority's offering of $1 billion in revenue bonds on May 13.

"The billion-dollar New Jersey turnpike deal, and some increase in transportation and refunding from April, is a big factor in issuance," Grabovac said.

Colby said that transportation will perform well because it offers more yield than other sectors.

Bacani was less optimistic.

"If folks are saying transportation is the cheapest on a risk-adjusted basis, once the herd rotates to that sector it drives up prices," he said.

Refundings totaled $10.28 billion last month compared to $13.29 in May 2013. New money increased 1% to $12.1 billion.

Even with the turnpike deal, New Jersey's issuance year to date declined by 46% to $4.4 billion.

Texas and California were the top state issuers with $14.5 billion and $14.0 billion in issuance, respectively, year to date. California's volume fell from $24.3 billion through May in 2013, while Texas' increased from $13.9 billion.

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