Municipal bond volume plunged the most in 17 months in September as concern over interest rates and holiday shortened trading sessions cut into issuance.
Long-term muni bond issuance declined by 27.3% to $18.32 billion in 737 issues, from $25.21 billion in 812 issues in September of last year, according to Thomson Reuters data. Volume last fell more than this in April 2014, when the monthly volume dropped 44.1% to $26.58 billion from a year earlier. Third quarter volume was up from the same period of last year, though issuance fell from the preceding two quarters.
"Overall we are not surprised that the third quarter is more in-line with last year, as we had a major spike in refunding in the first half of 2015 as investors were preparing for rate hikes, which cannibalized refunding activity for the remainder of the year," said Mikhail Foux, director, research, Barclays Capital. "Our estimate for 2015 is and was $390 billion."
"We always expected a substantial slowdown of primary supply in the second half of the year. Of course anticipation of the FOMC also played into this," he added, referring to a lull in issuance before the Federal Open Market Committee meeting, at which policy makers decided not to raise the benchmark rate.
Issuance for the third quarter was up 8.5% to $84.43 billion from $77.79 billion during the same period last year, following issuance of $116.46 billion in the second quarter and $107.80 billion in the first.
"This month we had Federal Open Market Committee meeting plus Labor Day was late and we had a bunch of religious holidays," Foux said. "On top of that we had the global market volatility, with the collapse in equities and concerns about China. I am not surprised by the drop off but the magnitude of it is a bit surprising. It doesn't seem like investors are in a hurry to come to the market and that is surprising to me. I thought people were waiting for the Fed and now that it is behind us, we haven't seen it pick up that much."
Alan Schankel, municipal strategist at Janney Capital Markets said that while the FOMC meeting was a factor in the lack of volume this month, the overall drop mostly had to do with the decrease of refundings.
"It all ties together with the interest rates," he said. "For example if you look at the Bond Buyer 20 bond index, this year compared to 10 years ago there is a big difference. For most of the year, there was a difference of about 80-90 basis points and right now it is closer to 50. I also think that the market and the participants are exhausted from all of the deals and large volume we have seen and are taking a breather. No one anticipated we would see this much issuance at the start of the year, so the year has been much busier than expected."
Refundings decreased by 31.6% in September from a year earlier to $7.37 billion in 264 transactions from $10.02 billion in 306 transactions.
New money issuance ended a string of three consecutive positive months, , as it dipped 16.1% to $8.39 billion in 413 deals from $10.01 billion in 453 deals. Combined new money and refunding transactions fell by 42.1% to $2.55 billion from $4.41 billion.
Issuance of revenue bonds was 18.3% higher to $17.53 billion and general obligation bond sales rose by 33.4% to $13.23 billion.
Negotiated deals were down 25% to $14.26 billion and competitive sales declined by 13% to $3.77 billion. Private placement deals plummeted 84% to $297 million.
Taxable bond volume was 53.9% lower to $902 million from $1.96 billion, while tax-exempt issuance declined by 25% to $16.59 billion. Minimum tax bonds digressed 26.7% to $827 million from $1.13 billion.
"Taxable issuance should also pick up, as we are on track to reach more than $30 billion this year, which is more consistent with previous post-BAB years, proving that 2014 was an aberration," said Foux.
Issuance of revenue bonds was 34.5% lower to $10.59 billion and general obligation bond sales fell by 14.5% to $7.73 billion.
Bond insurance decreased for the second month in a row, as the volume of deals wrapped with insurance declined by 10% to $1.22 billion from $1.36 billion.
"Puerto Rico effects bond insurance as two of the three insurers have substantial exposure," said Foux. "We need to monitor the situation and how it effects the industry going forward, the environment is good for insurers - we do anticipate a rates rise at some point and a huge credit spread to compression by rating. The market used to be much higher rated, then we are today. The bread and butter for insurers are these A and triple-B ratings and there are more of them today, plus the tick up in issuance also helps them."
Issuance decline in six out of 10 sectors for the month, with development, housing, public facilities, and transportation as the only sectors to see increases, which were of 0.6%, 12%, 30.3% and 20.4%, respectively.
Sectors that saw a drop in volume included: education sector, with a decline of 20% to $4.46 billion from $5.57 billion; healthcare, which declined by 40.6% to $969 million from $1.63 billion; and utilities, off 64.4% to $1.21 billion from $3.41 billion.
"I'm surprised that utilities are down so much," said Foux. "Many will have to deal with the new EPA rules and I would expect issuance in this sector to pick up substantially going forward."
Foux also thinks that the numbers for the healthcare and education sectors might be a bit misleading.
"I assume many issuers are coming with corporate CUSIPs in both the education and healthcare sectors, which probably why the numbers are lower because corporates are not included," he said.
California, Texas, New York, Florida and Pennsylvania remain the top issuers for the year to date.
The Golden State kept the top spot with $43.06 billion of issuance thus far in 2015, while the Lone Star State was second with $37.78 billion. The Empire State is third with $30.62 billion, the Sunshine State came in fourth with $16.11 billion and the Keystone State ranked fifth with $15.25 billion.
"I do expect volume to pick up again and I think we have a shot at catching the 2010 total numbers by years end," said Schankel. "I think the refunding activity will pick up and that we will see a rate hike this year, but it will be a different hike - as this time we are at 0, so the yield curve will flatten out and long term rates will not rise. Also, munis tend to outperform other fixed income classes during rate rises, and that should get some more participants in the market."
