Low yields and tight yield spreads on the short end of the municipal market largely shaped the municipal note market, which saw a small decline in first half 2009 volume, compared with the first half of 2008.
Overall, total volume decreased to $21.38 billion in 1,405 issues, down from $22.06 billion in 1,504 issues in the same period last year, according to new data from Thomson Reuters.
In spite of the overall decline, month by month volume was somewhat mixed. Issuance spiked in April by 23.7% or $602 million to $3.14 billion, making it the busiest April since the $3.1 billion in notes sold in 2002. May was also strongly higher, by 71% or $1.49 billion to $3.60 billion. In contrast, issuance dropped by 0.3% in March to $1.417 billion and 25% or $3.07 billion in June
when issuance dropped to 446 deals totaling $9.20 billion, down from 517 issues worth $12.28 billion in 2008.
There was less activity in the first quarter when just 594 note deals worth $5.42 billion came to market compared with the second quarter, when issuance increased to 811 deals totaling $15.96 billion.
Last year, 555 note sales worth $5.13 billion were priced in the first quarter, versus 949 issues totaling $16.93 billion in the second quarter.
“The limited supply, coupled with policy-driven reductions in short-term rates, were factors that dominated the market,” said Herman Charbonneau, a senior vice president and manager of public finance at Roosevelt & Cross Inc. in New York City.
“The supply of short-term paper is relatively inelastic,” he added. “Low rates don’t necessarily increase volume by a large amount.”
In addition, Charbonneau said the limited availability of letters of credit and standby bond purchase agreements also contributed to the lag in activity in the first half, he said.
“You will likely see low note rates and compression between quality classes in the very short end of the curve until the economy finally begins to perform to potential,” he said.
Two of the only areas of the note market that saw noticeable increases in the first half were bank-qualified issuance and the volume of note refundings.
For instance, bank-qualified issuance soared to 969 issues totaling $3.74 billion, up from 785 issues worth $2.07 billion over the same period last year.
“Bank-qualified notes probably rose just because of the more liberal terms for BQ classification that were incorporated into the American Recovery and Reinvestment Act of 2009,” Charbonneau said.
“Increased sales volume from smaller issuers faced with the need for more cash-flow borrowings might also have played a part” in the rise of bank-qualified volume, he added.
Even though the number of refunding note deals remained at 22 for this year and last, the volume ballooned to $486.3 million, up from $267 million year-over-year, driven by the lower overall rates, sources said.
New-money note issuance, meanwhile, decreased slightly to 1,378 issues totaling $20.76 billion, compared with 1,478 issues worth $21.73 billion last year.
One of the most noticeable but not unexpected declines was the plummeting insured note deals to zero from 11 issues totaling $925.2 million in the first half of 2008.
Charbonneau said he wasn’t surprised by the disappearance of bond-insured note deals due to the lack of viable insurers in the first half of 2009, as well as the limited premiums available to those that were active.
“It is unlikely that any insurance — if available — would have been cost-effective,” he explained.
Note deals with letters of credit also took a nose dive in the first half of 2009. The volume of LOC-backed deals shrunk to four with a par volume of $117.4 million compared with 20 deals totaling $2.91 billion in last year’s first half.
Like the pool of bond insurers, the universe of LOC providers has diminished, Charbonneau noted.
“The survivors are pickier about credit, and costs have gone up sharply,” he said. “The compression of yields and yield spreads in the short end probably limited the cost-effectiveness of any available LOC backups.”
Note issuance also declined in terms of revenue deals, which dropped to 45 issues totaling $4.0 billion this year from 64 issues worth $5.88 billion last year. General obligation note issuance, meanwhile, saw a volume increase to $17.37 billion from $16.18 billion, while the number of deals dropped to 1,360 from 1,440 issues.
Meanwhile, in other activity, fixed-rate note issuance saw a large decrease in sales to 53 issues from 88 issues last year even as total volume rose to $21.28 billion in the first half from $20.75 billion last year.
The issuance of variable-rate note deals with short puts dropped to just three deals totaling $94 million, versus 16 issues worth $1.21 billion in the first half of 2008.