Muni Volume Bounces Back Thanks to New Money Deals

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Municipal bond volume increased in July from a year earlier, as new money issuance more than made up for a drop in refundings to the lowest monthly level of 2015.

Monthly Data

"July issuance was very much in line with historical norms as well as market expectations," said Sean Carney, director and municipal strategist at BlackRock. "This month was 5% above the 10-year average and down 11% compared to last month."

Long-term muni bond issuance increased by 10.9% to $30.75 billion in 949 issues, from $27.73 billion in 862 issues in July of last year, according to Thomson Reuters data. Volume had fallen from a year earlier for the first time in 10 months in June.

"July is a month which typically experiences a relatively low amount of issuance," said Tom Kozlik, managing director and municipal strategist at PNC Capital Markets.

Refundings, which have been the biggest driver as issuance surged this year, began to slip last month and continued that trend in July, declining 5.6% to $10.36 billion in 310 issues, from $10.98 billion in 344 issues.

"Refunding activity should continue to be strong going forward if interest rates cooperate," Kozlik said. "Technically speaking a yield curve flattening from a Fed-driven increase in shorter term rates could improve refunding savings, assuming long-term rates remain stable. Time should reduce escrow negative arbitrage, and generate additional advance refunding candidates."

New money issuance jumped for a second month, rising 26.6% to $15.05 billion in 553 transactions, from $11.88 billion in 446 transactions during the same time frame last year. Combined new money and refunding transactions increased by 9.7% to $5.34 billion from $4.87 billion.

"Overall I am still seeing and expecting new money issuance has and will be muted, mostly because issuers are hesitant to add fixed costs," said Kozlik. "Issuers, in most cases, are trying to be as mindful as they can about balancing revenues and expenditures."

Carney said that while new money issuance is increasing as a percent of overall volume as refundings slow, and with issuers such as New Jersey, Illinois, and Puerto Rico down year over year, "it would not be surprising to see the supply/demand technical push the market higher in the near-term."

Revenue bond sales were up 6.7% to $18.35 billion. General obligation bonds rose by 17.8% to $12.40 billion.

Negotiated deals improved 18.3% to $24.16 billion and competitive sales rose 7.6% to $6.35 billion. Private placement deals plummeted 82.8% to $241 million.

Taxable bond sales saw a 47.3% increase to $2.96 billion and tax-exempt issuance improved by 7% to $26.94 billion.

Bond insurance continued its upward trend as the volume of deals with bond insurance increased this month by 5.3% to $1.61 billion from $1.52 billion.

Issuance declined in five out of 10 sectors from July last year. The five sectors that saw improvements were development, education, electric power, health care and transportation.

The biggest gains came from the education sector which improved by 26% to $9.74 billion, electric power which more than doubled to $1.95 billion and transportation which was up 27.9% to $4.76 billion.

"Issuance for the month was well distributed given the wide variety of credits, structures and deal size," said Carney. "Issuance continues to come into the sectors where we are seeing the greatest demand."

The top five state issuers so far this year are California, Texas, New York, Florida and Pennsylvania.

California claimed the top spot among states with $35.78 billion of issuance thus far in 2015, while Texas is close behind in second with $32.41 billion. New York is third with $23.67 billion, Florida came in fourth with $14.34 billion of issuance so far this year and the Keystone state is on the Sunshine state's heels with $13.30 billion.

"While issuance is running 40% greater year over year, it does not feel like it," said Carney. "I attribute this to oversubscriptions being at higher levels during the recent weeks as well as retails involvement. It was encouraging to see the market rally during brief pockets of elevated supply albeit rates were largely responsible."

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