Long-term municipal bond volume reverted back to its trend of the year in July, reporting a 29.2% decline in issuance compared to the month in 2013, according to data provided by Thomson Reuters. Last month was the first, and only, month of the year that exceeded its 2013 total.
Issuance for the month totaled $21.367 million across 714 deals, compared to $30.181 million in 859 deals in 2013.
Months of sparse supply in the primary has made light issuance the primary trend of 2014, though investors have found this puzzling.
"It's curious because revenue collections and financial help of state and local issuers has been improving over a number of year," said Tom Dalpiaz, managing director at Granite Springs Asset Management, LLC.
After the shell shock and fallout of 2008, many local and state governments put the brakes on financed projects, instead focusing on rebuilding reserves and getting revenues and expenses in order, said Dalpiaz. With towns, cities, and state now facing smaller deficits, and in some case even surpluses, the market consensus is a majority, with obvious major exceptions, are in better positions than they were prior to the great Recession. Yet those projects have remained on hold, even in the low interest rate environment.
"At some point state and local governments are going to need to start doing these projects," Dalpiaz said. "Maybe it's this fall, maybe next year, but so far they've been gun shy about doing these projects and tapping the market."
The largest issuers in the market, however, have kept declines to a minimum, with state issuance falling only 16.6% from this month's state volume in 2013, totaling $174.5 billion in 2014 compared to $209.181 billion last year, according to data from Thompson Reuters.
Variable-rate bonds, however, saw increased popularity in 2014, with a 208.5% rise in issuance, totaling $1.734 billion in July 2014 compared to $562.1 billion last year.
The rise of variable-rate bonds would indicate that the market is mixed about economic indicators and the near-term future of interest rates. In one camp positive data like GDP numbers to investors that interest rates may be rising, as early as this fall, making floating rate lucrative rather than buying in the currently ultra-low interest rate environment, said a trader in Minnesota.
However, issuers do not seem to share the concern about rising interest rates.
"If you were worried about interest rates rising, you'd rather do a fixed rate issuance now and lock in these low rates," Dalpiaz said. "You wouldn't want to do a variable rate issuance."
The lack of consensus between investors and issuers is a testimony to the mixed economic data that has been released so far this year, the Minnesota trader said
"It's big tug of war between who's right about the overall direction of the economy," said Dalpiaz.
For investors struggling with the market's lack of supply, market participants believed that issuance may turn around as soon as September.
"September, October, November, they tend to be months where issuance picks up," Dalpiaz said. "It could even be more than usual because people will be looking to finance those projects they've been pushing off."
