WASHINGTON – The par amount of municipal trades reached a three-year high in the third quarter of 2016, beating the total from the same period a year ago by more than 50%, according to recently released Municipal Securities Rulemaking Board statistics.
The total par amount traded in this year's third quarter was $837.9 billion compared to only $551 billion the year before. The $837.9 billion is also a small increase from the $818.2 billion par amount traded in the second quarter of 2016 and the first time the amount has been above $825 billion since the second quarter of 2013.
While par amount traded increased, the total number of trades continued to decline to 2.15 million in the third quarter of this year. That number is a 7.7% decrease from the 2.38 million trades in the third quarter a year before and an 8% drop from the 2.34 million in the second quarter of 2016.
Michael Decker, managing director and co-head of munis with the Securities Industry and Financial Markets Association, attributed the continued par amount growth to continued large issuance volumes.
"Issuance and trading activity are closely correlated generally," Decker said. "[We] saw very strong issuance in August and September in the third quarter … and that is a lot of what drove trading volume."
He added that the market saw "huge issuance" in October and he expects to see a continuation or acceleration of the higher trading volume continue in the fourth quarter.
Customer buying activity in the third quarter mirrored the rise in par amount traded and the decrease in total number of trades. Customer buying increased in the past quarter to an average daily par amount of $6.71 billion compared to $4.40 billion in the third quarter of 2015, a 52% increase. The average daily number of trades of customer purchases simultaneously fell to 13,583 in this year's third quarter compared to 15,189 the year before, a roughly 10% decrease.
Decker said the trend toward higher trading volume with fewer trades aligns with the fact that issuance related trading tends to be in the institutional market, where larger dollar amounts in a smaller overall number of trades is common.
The most actively traded muni in terms of par with $2.4 billion traded during the third quarter of 2016 was a sales tax revenue bond from the Puerto Rico Sales Tax Financing Corp., according to the MSRB data. The bond was traded 234 times during the quarter.
The most actively traded bond by number of trades was a general obligation bond from the Commonwealth of Pennsylvania that was traded 3,248 times. The par amount traded for the bond was $324.3 million.
Variable rate demand obligation (VRDO) rate resets continued to decline in in the third quarter with 117,501 compared to 135,504 the year before. The number of continuing disclosure documents the MSRB received increased slightly to 33,100 from 32,073 in the third quarter of 2015.
Decker said VRDOs are "still very much a viable product" and that the market still sees new issuance of them every quarter. However, he added there are other options for issuers looking for short rate borrowing, including public and private floating rate notes as well as bank loan products.
"The VRDO market is not going away but issuers will continue to consider alternatives when they are looking at short rate products," Decker said.
