For the first month this year, long-term municipal bond volume has exceeded its 2013 total.
Issuance this June jumped 30.6% from the month's volume in 2013, totaling $34 billion in 2014 compared to $26.1 billion last year, according to data provided by Thomson Reuters.
John Dillon, managing director at Morgan Stanley, said volume is higher because interest rates are more stable than they were this time last year.
"This year there is not only stability in the rates, but to a degree there have been declining rates in the last year or so," he said.
Last June former Federal Reserve Chairman Ben Bernanke said the Fed would was looking to taper back the $85 billion of bonds it purchased every month to stimulate the U.S. economy.
After his comments the muni market began selling off, with yields on the 10-year triple-A general obligation scale increasing by 28 basis points to 2.56% on June 28, 2013 from June 3, according to Municipal Market Data. The 30-year rose by 59 basis points to 3.83% during the same period.
"The big story is the optics," Dillon said. "You have a downshift this year over last year."
Issuance has remained low all year, totaling $149 billion through June 30 compared to $179 billion the same period in 2013. Analysts said the combination of low interest rates and the start of reinvestment period caused the boost in issuance in June. Reinvestment period begins on June 1 and is the time when investors receive cash from coupon payments and from their bonds maturing, so they have more money to invest.
"My initial thought [about why there's more issuance] was that issuers were taking advantage of the declining rate environment given the impressive rally year-to-date," said Fred Bacani, Head of Fixed Income & Trading at Veritable LP in Newtown Square, Pa. "The sharp increase in June issuance comes during a big reinvestment demand period. Seasonal reinvestment demand means there's a significant amount of maturity and coupon payments in June and July. So, the heavy June supply was met with higher reinvestment demand and resulted in negative net supply."
Bacani also said the current low interest rate environment has spurred more refundings.
Refunding volume has been meager all year totaling $49.15 billion as of June 30 compared to $71.7 billion for the same period in 2013. Analysts said the lack of refunding issuances is one of the main drivers behind this year's low supply.
In June refundings picked up by 81.2%, reaching $12.4 billion from $6.86 billion last June.
"An uptick in refunding activity [more overall issuance] makes sense," Bacani said. "Municipalities are taking advantage of the lower rate environment."
Dillon said that because rates are not only remaining stable but declining, there is more comfort for issuers coming in to do those refundings.
"Rate compression and spread compression since the end 2013 and the beginning of January [are the reasons for more refundings]," said Adam Buchanan, vice president at Ziegler Capital Markets. "We've seen what MMD has done, and spreads have also tightened. This provides an environment where refundings can get done."
Yields on MMD's 10-year benchmark triple-A GO scale have fallen 53 basis points to 2.26% over the course of 2014. Yields on the 30-year have declined by 92 basis points to 3.28% over the same period.
Buchanan said Ziegler priced a $38 million refunding deal last week, and the present value savings were nearly double the borrower's initial target.
"The borrower was targeting 4% to 5%, and ended up with 8% in present value savings," Buchanan said.
Transportation issuances also kicked up this month, increasing by 161.6% to $5.9 billion from June of last year.
"The words 'crumbling infrastructure' have been in the headlines," Buchanan said. "In Chicago, it's striking how behind we are. That's going on all over the country, with the road infrastructure and transportation infrastructure. Major cities need a lot of money, so we should see volume up in that particular sector."
Market participants said there is currently heavy demand for transportation issuance. One of the year's largest transportation deals — a near-billion-dollar Texas Transportation Commission GO refunding priced by Bank of America Merrill Lynch June 19 — was quickly bought up by investors.
"The Texas Transportation Commission, backed by the full faith and credit of the State, brought a refunding deal totaling around $973 million," Bacani said. "This deal not only contributed to the refunding activity rise, but also the transportation sector increase given the dedicated revenues such as driver's license fees and motor vehicle inspection fees. It's a state GO in my mind."
Texas now leads the other 49 states in terms of 2014 issuance with $19.8 billion. California and New York rank second and third respectively, with the Golden State reaching $19.62 billion and New York hitting $15.75 billion.
Negotiated issuance increased by 22.4% from June 2013, to $23.89 billion. Competitive issuance rose 86.4% to $9.48 billion.
Bond insurance volume also increased, jumping up by 93% to $2.1 billion from $1.1 billion last June.
