September Volume Signals Revival

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Municipal bond volume in September showed the clearest sign yet of a rebound after slumping for most of 2014, analysts said.

Monthly Volume

Issuance for the month totaled $21.86 billion, 2.3% higher than in September 2013 and the third year-over-year gain in the last four months. Volume in June totaled $35.3 billion, 35.5% higher than the same month in 2013. August's issuance came in at $24.4 billion, a 7% increase.

Analysts said the larger gains in June and August reflected unusually weak volume in the comparable months of 2013, when the market was reacting to Federal Reserve Chairman's June announcement that the Fed would taper its bond-buying program. They predicted September's gain would prove to be the start of a steady climb.

"From here on out you're going to see volume numbers that are in line to moderately higher to what you had last year," John Dillon, managing director at Morgan Stanley Wealth Management, said in an interview. "Last year had the taper tantrum and supply really downshifted, which made comparisons this year much different than they otherwise would have been."

Dorian Jamison, municipal analyst at Wells Fargo Advisors, said in an interview that the current low interest rates spurred the increase in September issuance.

"Issuers are taking advantage of the incredibly low interest rate environment still, that's part of the reason we have seen supply increase," he said.

He predicted that supply will continue to increase in the coming months, because supply is typically higher near the end of the year.

"We have seen supply traditionally increase in October," he said. "So in the last eight years, we've seen supply increase in October and that's kind of coincided with the market being flat or relatively weaker in October."

Bond Insurance Surges

Bond insurance continued this year's comeback with a total of $1.15 billion bonds insured this month, 59.6% more than in September 2013.

"Events over the past year have underscored some of the important benefits of Assured Guaranty bond insurance," Robert Tucker, head of investor relations and communications at Assured Guaranty, wrote in an email. "Those benefits include greater price stability and improved market liquidity, along with the certainty of timely payment of debt service and our ability to work with an issuer to resolve its difficulties. As a result, nine month year-over-year insured volume increased 55% while the market's total volume was down 10%."

September's insurance levels are 53.25% lower than in August, when the total was boosted by a $1.8 billion Detroit Water and Sewer deal that had several of its parts insured.

"It seems as though you have a real organic gain in bond insurance, not just a commensurate with volume being a little bit higher," Dillon said. "It is slowly growing to a better, stronger market share, not just simply on the heels of Puerto Rico anxiety and Detroit and so on. I think overtime investors will warm to bond insurance. It won't probably ever be what it was, but I think its gaining some traction, and I think that's healthy to the market."

Michael Stanton, head of strategy and communications at Build America Mutual, said in an interview that it's been "business as usual this month" and that there has been a "consistent and steady growing demand for insurance." He said demand has been notable from small to midsized issuers.

Refundings Up, New Money Down

Refunding's kicked up during September, coming in 28.6% higher, at $8.63 billion, than they were in September 2013.

Refundings were boosted this month by large deals including a $2.1 billion four part California general obligation deal that devoted $956.6 million section to refunding. The University of North Carolina at Chapel Hill also sold $265 billion of taxable general revenue refunding bonds, and the New York City Municipal Water Finance Authority issued $225 million of revenue refunding bonds.

Sales of refunding bonds have been down all year. As of Aug. 30 refundings totaled $70.9 billion, 14.4% lower than in the same period in 2013.

Dillon said the boost in refundings this month is "obviously" one of the reasons why September's issuance was stronger than the same month's last year. He said they are picking up now because issuers are taking advantage of low interest rates.

"It's a lower rate environment today than September of last year," he said. "While in 2013 they were on the upswing, they have been coming down pretty constantly in 2014."

He called new money issuance this month "disappointing," however.

New money issuance was down 16.6% from a year earlier in September, to $9.5 billion.

"[Not issuing new muni bonds] seems like a missed opportunity, when rates are so low and munis have really outperformed," he said.

Jamison also noted that the market currently has a "strong appetite" for muni bonds.

"There have been inflows into muni bond funds 21 out of 25 past weeks," Jamison said. "I think we will continue to see strong demand."

Inflows for all municipal bond funds increased by nearly 200% for the week ending Sept. 24, according to Lipper FMI. Inflows totaled $588.77 million last week, up from $196.57 million the previous week.

Negotiated issuance rose by 26.3% from September 2013 to $17.8 billion, while competitive issuance declined 23.3% to $3.68 billion.

Sector and State Issuance

General purpose issuance for September increased the most from the same time last year, with issuance jumping 149.9% to $8.75 billion. After general purpose education issuance was high coming in at $5 billion, though this is 26.8% lower than it was September 2013.

California is the top issuing state for the year to date with $31.8 billion total in sales. This is still 16.1% less than the $37.8 billion it had issued by September 30, 2013.

Texas is the second highest issuer with its sales now up 0.7% from where they were by the end of September in 2013. For this year the Lone Star state has issued $27.98 billion.

New York comes in a close third with $24 billion of issuance this year.

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