January Issuance Falls 33%

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LOS ANGELES — Municipal bond issuance for the month of January came in even lower than analysts had estimated as higher interest rates cut into refunding volume and fiscal austerity curtailed new sales.

Long-Term Bond Sales: January

The year started out with 587 deals totaling $18 billion — down 33.4% from the same period in 2013, according to data from Thomson Reuters. That compares to 897 issues totaling $27 billion in January 2013.

"It's low, very low," said Eric Friedland, head of municipal research at Schroders Investment Management. "Lower than what I expected and I think lower than what most people expected it to be."

Most strategists predicted volume would fall in 2014, but if these trends continue, yearly sales will probably be even lower than initial estimates, he said.

James Colby, portfolio manager and senior municipal strategist at Van Eck Global, said January is typically a slow month for issuance and doesn't necessarily reflect what lies ahead.

"It's the New Year, people are coming off the holiday and vacation, and try to get their focus from a budgeting point of view on what they're going to be doing in the coming year," he said. "January has never been a month to see any meaningfully large new issuance."

The month's decline in issuance is a continuation of a steep drops in refunding deals, which accounted for a mere $3.6 billion of January's total issuance — a 71% decline from last year.

New money issuance, on the other hand, was up 36% with 371 deals totaling $11.4 billion. That compares to last year's 326 deals totaling $8.4 billion.

Combined new money and refunding issuance was down 53%, with 35 issues totaling $3 billion.

The amount of bonds issued by state governments and agencies dropped by 41% and 47%, respectively, during the month. Combined, they sold $6.4 billion in 51 issues, compared with $11.6 billion in 95 issues the year before.

Counties and parishes sold 31% less debt this year, at $1.3 billion in 28 deals. Cities and towns issued $1.9 billion of debt this year, down from $2.3 billion last January.

"What we've seen talking to both state and local officials is that there's a real spirit of austerity that remains even post-recession," Friedland said. "It's politically unattractive to propose new bond issues at this time."

He also noted that state budgets that for the coming year include fewer plans to issue debt than they have in the past.

For example, Friedland pointed to California's proposed budget, which includes using its surplus to rebuild reserves and redeem outstanding bonds, rather than issuing new bonds to finance structural improvements.

"Between the political climate and the budgets we're seeing, we don't expect volume to be very high this year," he said.

Among the sectors, housing, education, and transportation saw major declines of 50%, 42%, and 43%, respectively. The public facilities sector, with 26 issues totaling $947 million, was the only one to see an increase in issuance from last year.

Of the 587 deals during January, 71 were insured — a 7.6% increase from last year. The amount of letters of credit rose by about 14%.

Fixed-rate bond issuance fell 30.5% at $17.3 billion and variable-rate short-put volume plunged 48% to $143 million. Variable-rate long-put increased56% to $110 million.

Debt among the majority of the states was also down in January, though the country's top two state issuers actually increased issuance. New York, which was the top issuer among states this month, sold around $3.1 billion of debt, compared with $2.4 billion last year. Texas came in second place with $2.3 billion — a 49.5% increase from last year.

California, the third largest issuer in January, sold $1.8 billion, —down 43%.

The low issuance, in conjunction with the flight to quality in treasuries, has helped the municipal market perform well this month, said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.

"Issuers had no trouble finding buyers and many deals were oversubscribed," he said. "There's just a real lack of supply versus demand right now and I think that really exposed itself in January."

Heckman said he thinks the market will see a pickup going into the next months as rates are back down to levels more attractive for issuers to come to market, and cash receipts are coming in strong for states and local governments.

"I think there's still some hesitancy out there to take on additional debt," Heckman said. "Now that revenues are really improving and if economic activity can continue to maintain or improve here, especially on the employment front, I think we'll see a return of confidence of issuers and we're going to see a pickup."

Still, he added that he doesn't expect a major pickup and that there's still a lot more money on the sidelines.

"So we don't' see an environment where rates are going to move up too aggressively, which will be very conducive for issuers," Heckman said. "At the same time, we still think that yields are high enough that there's good relative value from the investor's viewpoint."

Colby said he expects to see a meaningful pickup going into April, when supply tends to increase.

"End of February, first part of March is going to be a time to take a second look at what's going on with new issuance," he said. "I would expect to see significantly higher numbers than what we're seeing right now."

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