Muni Volume Dips for First Time in 10 Months

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Municipal bond volume fell year-over-year for the first time in 10 months in June, as refundings to take advantage of lower interest rates slowed.

Monthly Data

Long-term muni bond issuance declined 3.9% to $34.39 billion in 1,246 issues, from $35.79 billion in 1,224 issues in June of 2014, according to Thomson Reuters data. Volume for the first half of this year is up 28.7% to $217.14 billion in 7,033 issues from $154.90 billion in 5,371 issues during the first half of last year.

Refundings have been the story for the year so far in 2015 as issuers were trying to take advantage of the near-record low rates. That trend reversed in June as refundings decreased 24.8% to $10.21 billion in 367 issues, from $13.56 billion in 417 issues.

"June was a relatively flat month, from a blistering pace for the first five months of the year," said Jim Grabovac, managing director and senior portfolio manager at McDonnell Investment Management LLC. "June saw a uptick in new money issuance, which is a change."

New money transactions increased by 22% to $18.69 billion from $15.32 billion. Combined refunding and new money transactions fell 20.5% to $5.49 billion from $6.91 billion.

Grabovac said he doubts the new money increase this month is the start of a new trend, though he added that refundings are unlikely to continue to slide, as issuers can still save on interest cost by refunding deals from a decade ago.

"2005 was a decent volume year; rates were more than 100 basis points higher, so even with the backup in rates year to date, there is an ample pool of refundings candidates as the year unfolds," he said.

Summer has official started and that usually means the muni market goes into a lull. Natalie Cohen, managing director at Wells Fargo Securities, said this year we might see a busier summer than usual.

"New money will remain in the ballpark [of where it was this time], a high level redemptions will be coming in, which is money that will be looking to be put to work and I think issuers will still be trying to get ahead of the rates rise," she said.

Negotiated bond sales edged up by 3.9% to $25.08 billion from $24.13 billion, while competitive deals declined by 4.8% to $9.06 billion from $9.52 billion and private placements plunged 88.1% to $255 million from $2.14 billion.

Sales of revenue bonds slipped to $18.67 billion in 445 deals from $18.71 in 392 deals, a decrease of just 0.2%. General obligation bond volume slid 7.9% to $15.73 billion in 801 issues from $17.08 billion in 832 issues.

Tax-exempt deals were down 6.8% to $30.63 billion, while taxable deals increased 8.3% to $2.68 billion. Minimum tax transactions more than doubled to $1.08 billion from $461 million.

Fixed-rate issues decreased 1.5% to $32.50 billion in 1,204 issues from $32.99 billion in 1,154 issues from the previous year.

The volume of deals with bond insurance increased by 35.7%, as the par amount wrapped advanced to $2.84 billion in 187 deals from $2.09 billion in 167 deals.

Two sectors that had faced headwinds — education and health care — both had positive months. Education saw an increase of 33.7% to $11.58 billion from $8.66 billion and healthcare was up 65.6% to $3.29 billion from $1.99 billion.

Development deals jumped 57.1% to $1.79 billion from $1.14 billion and general purpose transactions increased 18.3% to $10.61 billion from $8.97 billion. The other six sectors saw significant decreases year over year.

"The big question is: why isn't there more borrowing for new money in this low interest environment?" Cohen said. "I think the answer has more to do with the sluggishness in the economy and the job and wage and salary level; there is less money going into big projects and longer-term projects."

The top five state issuers so far this year are California, Texas, New York, Pennsylvania and Florida - the same as in the past two months.

California claimed the top spot among states with $31.17 billion of issuance thus far in 2015. Texas is in second, having issued $25.18 billion year to date. New York is third with $20.39 billion in issuance thus far. Pennsylvania is fourth with $12.16 billion and Florida rounds out the top five with $11.88 billion.

"With all of the significant credit developments, the balance between riskier markets and high balance markets might make a nice cushion for the anticipated Fed action we will see later this year, early next year," Grabovac said. "It's difficult to look at the volume on a month to month basis, but everything that we see, it looks to be a healthy issuance year going forward."

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