Feb. Muni Volume Soars on Refundings

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Municipal bond volume extended its surge in February, once again driven by refundings as issuers continued to take advantage of lower interest rates.

Long-term municipal bond issuance increased 78.5% to $29.46 billion from a year earlier, the seventh monthly gain in a row, as refundings more than doubled to $14.53 billion from $5.11 billion in February of 2014, Thomson Reuters data show.

"Issuance thus far has surprised to the upside, mostly a function of refunding issuance," said Peter DeGroot, managing director at JP Morgan Securities. "Advanced refundings have increased because of two things: increased shorter dated treasury yields, as intermediate and longer dated tax exempt yields have declined. AA benchmark yields in the 10-year area of the curve are about 50 basis points lower this year relative to last year, while the 30 year spot is about 90 basis points lower in yield from a year ago."

Chris Mauro, director of municipal bond research, RBC Capital Markets said a week by week analysis showed refundings started high and have gradually gotten lower as the month went on. However, he also said if volume continues at the pace of the first two months, the yearly total would come to about $440 billion. Volume for the two months adds up to $56.54 billion, the most since 2010's $59.714.

Before that "you would have to go back to 2007 to get a bigger number," said Mauro. "The January number alone would annualize to $450 billion and that is a pretty huge volume. My suspicion is that this year will be a replay of 2013, where we had greater than average volume in the first half and then when rates kicked up in the second half, refundings dropped off."

New-money issuance increased 8.7% to $10.48 billion from $9.64 billion in February last year. Combined issuance increased 154.1% to $4.44 billion from $1.75 billion the previous year.

"New money issuance is basically flat, this is what we expect this year as issuers continue their austerity measures, prepare for uncertainty (like potential state aid cuts) and try to strengthen their balance sheets," said Tom Kozlik, municipal credit analyst, Janney Capital Markets.

Negotiated deals more than doubled to $21.85 billion in 635 deals from $10.82 billion in 423 deals for February of last year. Competitive deals were up 97.4% to $7.46 billion in 357 deals from $3.78 billion in 237 deals and private placement deals dropped 92.0% to $151.6 million from $1.90 billion.

All sectors with the exception of development, environmental facilities and transportation had year over year gains in February, with education, utilities and general purpose standing out from the rest. Education increased 111.8% to $11.80 billion in 501 deals from $5.57 billion in 257 deals, while general purpose rose 79.7% to $6.78 billion in 258 deals from $3.77 billion in 148 deals in February 2014.

State agencies increased issuance to $6.81 billion from $2.69 billion. Cities and towns boosted issuance by 74.3% to $3.60 billion from $2.06 billion while district bond sales surged 97.4% to $8.63 billion from $4.37 billion.

Bond insurers continued their momentum, as they wrapped 66.2% more by par value with $1.93 billion in 166 deals compared to $1.16 billion in 93 deals in 2014.

"The use of bond insurance has continued to increase as the amount of issuance increased year over year in February, this makes sense as investors continue to see the value the leading insurers can offer," said Kozlik.

The top five state issuers this past month were Texas, California, New York, Pennsylvania and Washington. Texas remained in the top spot, with an increase of 20.1% to $6.65 billion in issuance from $5.54 billion. California and New York switched positions, as the Golden State moved up from the third spot to the second spot, with an increase of 41.3% to $5.43 billion from $3.84 billion. The Empire State moved down to third, falling 7.8% to $4.15 billion from $4.50 billion in 2014. The Keystone State made the biggest jump year over year, moving to fourth place from 12th place, rising 305.0% to $3.66 billion from $903.6 million. Washington state moved up to fifth from eighth, increasing issuance by 199.5% to $3.16 billion from $1.06 billion in 2014.

"We think issuers are smart to take advantage of the low interest rate environment," Kozlik said. "No one knows exactly what will cause rates to shoot up but recent experience from the fall of 2010 and the summer of 2013 shows that when they do rise they rise very, very quickly."

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