Spending money on new projects is politically unpopular in the minds of municipalities across the country.
As a result, the culture of austerity that's taken hold at state and local governments across the country has put the squeeze on new money issuance through the first quarter of 2012. The shift is a psychological one among issuers, said Mikhail Foux, a muni analyst at Citi.
"Everyone is talking about austerity," he said. "In the longer term, it's not good. But we live in an environment of austerity, and there's very little appetite for new projects, and even supporting old ones."
For the first three months of 2012, new money issuance fell 2.8%, to $26.46 billion on 1,030 issues, according to numbers from Thomson Reuters. That compares with $27.22 billion on 1,118 deals over the same period in 2011.
And yet, overall volume is up 63.5% for the first three months of 2012, versus the same period in 2011. Refundings, meanwhile, account for the increase. They have risen 159% through the first three months of this year, compared with the same period in 2011.
Interest rates also have played a role in the refinancing and new money numbers, industry pros say. As rates have lingered at historically low numbers for much of the past six months, issuers have tried to take advantage of the lower borrowing costs when they can.
But issuers' plans for new money bonds are not quite as sensitive to lower rates as are their plans for refinancings, said Chris Mier, a managing director in the analytical services division at Loop Capital Markets. A municipality that needs to build a bridge is probably going to do it regardless of rates, he said, but it's also going to try to take advantage of a rate environment.
Furthermore, the rate environment has been relatively low for several years. So, if municipalities had important projects, some of those likely got funded 2011, at a time when few, if any, thought that interest rates would reach their current rock-bottom levels, said Priscilla Hancock, executive director and municipal strategist at JPMorgan Asset Management.
"You're seeing more of a reversion to essential projects," she said. "And many of them got bonded for last year."
But the political environment for austerity is the most dominant factor behind why municipalities are holding back on issuing new money.
"From a politician's standpoint, it's not a great time to go to the taxpayer and say: let's build that new football stadium, or let's build a new library system, or whatever it is," Mier said. "There's some rationing that's going on related to the political environment. That sensitivity is continuing forward from last year to this year."
And with national, state, and local elections coming up in November, the general economy and shift to austerity are likely to keep new money issuance down for the remainder the year, if not longer, Mier added.
In addition, smaller or infrequent issuers — such as a local school district that might issue bonds every three to five years to advance refund debt they already have outstanding — tend to focus on specific projects at certain times. And when the rates are lower, they look for times when they can advance refund bond issues and save money, Mier said.
"It's not any indication of better health or worse health of the muni market," he said. "It's kind of a new trend. We don't know how long it's going to last, but it's something that we haven't seen in a while."