Municipal bond volume came back to earth in May, after being in orbit for most of the year, as refunding deals slipped closer to a normal level.
Long-term muni bond issuance rose 14.5% to $31.86 billion in 1,126 issues, from $27.82 billion in 1,076 issues in May of 2014, according to Thomson Reuters data, the 10th straight increase. That contrasts with monthly year-over-year gains of 38.7%, 78.5%, 43.7%, 42.1% from January through April.
"This is the first month in 2015 that hasn't posted above average volume," said Chris Mauro, director of municipal bond research at RBC Capital Markets. "This will probably be short lived, though. We think that June will be heavy again because we suspect that some of the May issues were pushed into June in an attempt to take advantage of the higher June reinvestment."
For the month of May, refundings edged 2.8% higher to $11.24 billion in 390 issues, from $10.92 billion in 387 issues. New money transactions declined by 8% to $12.34 billion from $13.42 billion, while combined refunding and new money transactions more than doubled to $8.29 billion from $3.48 billion.
"Issuers are doing all they can right now in front of the higher rates, and a lot of that activity has taken place," Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management Heckman, said of the slowdown in refundings. "We have reached a crescendo in terms of refundings and that is not a big surprise to us, there is a finite [limit] to how much refunding you can do. It is hard to maintain the pace we have been at."
Tom Kozlik, managing director and municipal credit analyst at Janney Capital Markets, had a different take.
"There are plenty of municipal bond refundings to be had, especially at these interest rate levels," he said, adding that he expects the refunding supply to be plentiful, while new money falls from last year.
"The fiscal status of state and local governments is not as plentiful as the 'economic recovery' rhetoric would allow it. Therefore, issuers are choosing to control one part of the balance sheet that they can, meaning debt service," he said.
Mauro said the new money percentage will creep higher as rates rise.
"Unless the par amount of new money issuance actually increases, total volume will likely moderate later in the year if rates continue to rise," Mauro said.
Negotiated bond sales increased by 12.8% to $22.01 billion from $19.51 billion, while competitive deals more than doubled to $9.59 billion from $4.72 billion and private placements plunged 92.9% to $254 million from $3.58 billion.
Sales of revenue bonds decreased 14% to $16.66 billion in 325 deals from $19.36 billion in 369 deals. General obligation bond volume jumped 79.8% to $15.20 billion in 801 issues from $8.45 billion in 707 issues.
Variable-rate short put issues declined 76.7% to $423 million from $1.81 billion a year earlier, while variable-rate long with no put decreased 57.8% to $122 million from $288 million.
"The variable rate (VRDO) market supply is continuing to weaken. This is also not surprising considering the low interest rate market," said Kozlik.
Tax-exempt deals were up 27.3% to $29.45 billion, while taxable deals were down 22.7% to $1.84 billion.
Fixed-rate issues increased 23.5% to $30.01 billion in 1,077 issues from $24.31 billion in 1,004 issues from the previous year.
The volume of deals with bond insurance increased by 72%, as the par amount wrapped advanced to $2.37 billion in 159 deals from $1.38 billion in 107 deals.
"The use of bond insurance is up again, not surprisingly," Kozlik said. "We are certainly seeing investors, especially individual investors, placing value in insured wraps."
Volume increased in seven out of 10 market sectors: Electric power more than doubled to $2.16 billion from $828 million; general purpose deal volume doubled to $8.36 billion from $4.16 billion the year before; education jumped 46.4% to $11.19 billion from $7.64 billion; and utilities improved by 56.7% to $3.75 billion from $2.39 billion.
The top five state issuers so far this year are California, Texas, New York, Pennsylvania and Florida - the same order as at the end of last month.
California claimed the top spot among states with $25.49 billion of issuance thus far in 2015. Texas is close behind in second, having issued $21.62 billion year to date. New York remains far behind the top two with $14.50 billion in issuance thus far. Pennsylvania is fourth with $10.69 billion and Florida rounds out the top five with $9.42 billion.
"Munis continue to be underappreciated by investors, as they have been waiting on the sidelines anticipating" the Federal Reserve policy makers will act to increase the Fed Funds rate, Heckman said. "We don't think rates will rise that much period, but we do think munis look attractive and we think there is a lot of value relative to other areas of the fixed income marketplace."
