Municipal bond volume continued its downward spiral for a seventh month in March, even as the spring brought a surge in new money deals.
Total monthly volume for March fell 13.8% to $39.38 billion in 1,057 transactions from $45.68 billion in 1,351 transactions in March of 2015, according to data from Thomson Reuters. Muni long-term volume finished the first quarter down 12% to $95.49 billion in 2,836 deals from $108.49 billion in 3,292 deals from the first three months of 2015.
A 45% leap in new money deals was the biggest news of the month, analysts said, as refunding transactions continued to slide. New money volume surged to $15.06 billion from $10.36 billion.
"It's great to see. People in the industry have been harping about how we need new money deals for our infrastructure needs, and it looks like state and local governments are starting to do that," said Natalie Cohen, a managing director at Wells Fargo. "The interest and demand is there for the paper, but it's ultimately up to the governments to supply it."
The surge may be short-lived, according to Tom Kozlik, a managing director and municipal strategies at PNC Capital Markets.
"New money was up in year-over-year in the first quarter, but we are not expecting this to continue for the entire year," said Kozlik. "We still think most municipal bond market issuers are hunkering down, and are unlikely to add more fixed costs while they are trying to deal with revenues that are not rising as fast as they have in the past, and other expenditure demand that is crowding out spending."
Refundings fell 25.7% to $16.01 billion from last year's extraordinary level of $21.56 billion.
"Last year at this time, people were positioning for higher rates and it still hasn't happened and doesn't look like it's going to happen any time soon," Cohen said.
"General market bond sales to date reflect what we are expecting, for overall issuance to be just lower than it was last year," said Kozlik. "Refundings might be down year-over-year but that is not because rates are not cooperating, issuers should still be able to get some good present value savings."
Combined new-money and refunding issuance dropped by 39.6% to $8.30 billion from $13.76 billion.
Issuance of revenue bonds fell 16.6% to $20.43 billion, while general obligation bond sales declined 10.5% to $18.95 billion.
Negotiated deals were down 8.8% to $31.83 billion and competitive sales decreased by 21.8% to $6.74 billion.
Taxable bond volume was 34.4% lower to $2.36 billion, while tax-exempt issuance declined by 11.3% to $36.75 billion.
Bond insurance dipped 16% in March, as the volume of deals wrapped with insurance declined to $2.34 billion in 159 deals from $2.79 billion in 230 deals.
Six sectors posted year-over-year increases, led by development which increased 67.2% to $1.04 billion from $621 million. Public facilities increased 42.5% to $841 million from $590 million and utilities increased 26% to $4.48 billion from $3.55 billion.
Housing also posted an impressive 45.5% improvement to $1.57 billion from $1.08 billion.
"Housing bond issuance continued its slow, stubborn recovery in the first quarter of 2016," Kozlik said. "Housing issuance was up about 40% in the first quarter, year-over-year. This is not surprising and is the continuation of a trend we saw in 2015. Additional capital markets issuance by housing issuers will continue to help HFAs repair and add recurring revenues to their balance sheets."
Kozlik said that housing bond issuance was up almost 30%, to about $7 billion in 2015 from 2014 and that the peak of housing bond issuance was near $25 billion a year in both 2006 and 2007.
"Economic refundings are helping to drive some of this housing sector issuance," he said. "Economic refunding activity could likely continue especially considering heavy issuance in 2006 and 2007. The Moody's housing team called this upward issuance trend a "credit positive" in a March 25th report," he said.
California jumped past Texas to take the lead as the biggest source of issuance among states in the first quarter. Texas was second, followed by New York, Florida and Illinois.
The Golden State finished the quarter with $12.72 billion, while the Lone Star State had $12.57 billion. The Empire State has a big gap to close if it wants to move up, having issued $9.59 billion so far this year.
Sunshine State issuers sold $5.33 billion, comfortably ahead of the Prairie State's $3.43 billion.
Cohen said demand for munis is high, with $12 billion of investor money coming from foreign countries since 2011. "The muni market is relatively safe and less volatile compared to other classes," she said. "There is a lot of pressure from the rest of the world, as you see some countries have gone with negative rates. But there is still steadying improvement in our economy, and we should see that number continue to climb as time goes by."
