WASHINGTON — Municipal bond issuance is expected to increase to $458.0 billion in 2013, a 9% jump from the $420.3 billion issued through mid-December of this year, according to the Securities Industry and Financial Markets Association's annual survey of dealer firms.
The 12 dealer firms that responded to the 2013 Municipal Bond Issuance Survey expect more issuance of both short- and long-term bonds. They predict $65.0 billion of short-term notes will be issued next year, up from $55.6 billion so far this year, and $393.0 billion of long-term notes, compared to $364.7 billion this year.
The survey projects long-term tax-exempt municipal issuance will increase to $345.0 billion in 2013, up 7.7% from $320.4 billion issued so far this year.
Despite predictions of growth, the report says dealers are concerned about budget negotiations in Washington. Issuance could be affected if Congress curtails the tax benefits of muni bond interest, an option proposed by President Obama.
The result could be higher yields and less ability of issuers to achieve debt-service savings through refunding, said Michael Decker, co-head of the municipal securities division at SIFMA. "If there is significant curtailment in the tax-exemption, I think you will see issuance lower than what we are projecting," he said.
The market also could be affected if the nation topples over the so-called fiscal cliff, which would lead to the expiration of Bush-era tax rate cuts and across-the-board federal spending cuts. As a result, rates could rise and municipal issuers could be downgraded. Dealers also expressed concern about underfunded pensions and possible reductions in federal funds transferred to state and local governments.
Long-term taxable muni issuance will rise 11.4% to $35 billion and issuance of long-term bonds subject to the alternative minimum tax will edge up 0.7% to $13 billion next year, according to the survey.
Variable-rate demand obligation issuance is expected to hit $15 billion in 2013, up from this year's 20-year low of $11.9 billion. Direct-placements or bank loans are expected to account for $37.5 billion, or 9.5%, of long-term issuance next year.
The report says 75% of dealers think general purpose bonds will account for most issuance in 2013, while 16% expect transportation bonds will be the majority.
Respondents expect a median of 41 issuers will default next year for a par value of $2.7 billion. The report defines defaults missed interest or principal payments or a bankruptcy filing.
Decker said the expectation for increased issuance in 2013 is based largely on the expectation that interest rates will remain low and issuers will take advantage of low rates by refunding existing debt.
"[The report] indicates the market is operating efficiently and [that there are] opportunities for issuers to secure new money financing with the lowest muni rates in our lifetime, or generate significant debt-service savings through refunding transactions," Decker said.
The survey predicts that refundings will account for 43.5% of long-term tax-exempt issuance next year, a new high, compared to 41% in 2012.
Respondents expect the federal funds rate to remain unchanged in 2013 and that the yield on the two-year Treasury note will remain at .25% until the first quarter of next year and then gradually rise to .40% by the end of December.
They expect the ten-year Treasury note to climb gradually from a rate of 1.6% this year to 1.97% by the end of next year.
The yield ratio between 10-year, triple-A general obligation bonds and the 10-year Treasury benchmark is expected to rise from 95% this December to 97.5% the same time next year.