Municipal bond sales declined 16% in March, a drop that would have been steeper had Puerto Rico not come to market with its general obligation bonds during the month.
March volume fell to $27.63 billion in 689 deals from $32.75 billion in 1009 deals in the same month last year, according to Thomson Reuters.
"Volume was unimpressive given the historical average for the month is almost $10 billion higher," said Sean Carney, municipal strategist at BlackRock.
Volume from January through March totaled $62.48 billion, down from $84.43 billion for the three months last year.
January and February issuance was even lower than March's with $19.21 billion in January and $15.64 billion in February.
Volume increased in March from February as sales jumped to $11.4 billion for the week of March 14, including blockbuster Puerto Rico and California general obligation deals that totaled $3.5 billion and $1.79 billion, respectively.
"If it were not for that one week when Puerto Rico and California came, the numbers would be substantially worse," said James Colby, senior muni strategist at Van Eck Global.
General obligation issuance increased by 3.9% to $14.23 billion with 471 deals this year compared to $13.69 billion in 652 deals in 2013.
John Dillon, managing director at Morgan Stanley, pointed out that if Puerto Rico's GO offering is removed from GO volume last month, it would have declined approximately 22% from a year earlier.
"Puerto Rico really distorts the data in March," Dillon said. "If you were to strip out Puerto Rico you would have a different picture."
He said the Puerto Rico data was marketed to non-traditional municipal buyers such as hedge funds.
"It did not make the market feel any better, because it went to non-traditional investors. So even if it looks better in data it may not feel better in the market," Dillon added.
Revenue bonds have declined this year by 32% to $12.8 billion, with 198 issuances from $18.89 billion from 355 issuances last year.
Both new-money issuances and refinancings dropped.
New-money issuance in March this year was $9.39 billion in 360 sales. That's down 31% compared with 2013's $13.64 billion in 404 issuances.
"I think new money is down consistently with refundings, but I do think new money will be the leader for the rest of the year," Dillon said.
Strategists have expressed concerns about new-money issuance for the rest of 2014 because adding debt is not popular in an election year.
Dillon doesn't think this year's election will have that effect this year.
"I don't think new money will be slow because it's an election year, because projects that have been put off for years are now back on," he said.
March refundings dropped by 39% to $8.44 billion in 263 issuances, from $13.89 billion in 512 offerings in 2013.
Strategists are divided over whether refunding will pick up in the second quarter or further on in the year.
"While many are beginning to revise down full-year estimates, which seem correct, it is important to note 30-year municipal yields are lower by 56 basis points year to date and that refunding activity has the potential to increase" in the second quarter, Carney said.
"While we understand the headwinds that mid-term elections and greater regulations have on issuance patterns, it is conceivable that issuance does increase in coming months, however it is difficult to imagine it will skew the current supply-demand imbalance that aided such a positive quarter," he said.
Colby said there may be a small window of opportunity for issuers to refinance in the second quarter amid fears of rising interest rates, but that window probably doesn't apply to issuers on a broader scale.
"Unless we get a huge rally in fixed income and yields plummet, I find it harder to see refinancings become a story for new issuance in the second quarter," Colby said.
All revenue sectors except utilities and general purpose fell in March, with housing and health care experiencing the steepest declines.
Housing fell by 84% to $278.2 million in with 11 issuances, after reaching $1.71 billion in 2013 in 44 deals. Health care decreased by 79% to $544.2 million in 13 deals from $2.6 billion in 25 issuances in March 2013.
"The question really is whether there is a secular trend at work, and that concern has to do with risk-aversion amount issuers," Robert Donahue, managing director at Muncipal Market Advisors .
General purpose issuance grew 55% to $12.19 billion from $7.86 billion last year. General purpose's volume rose even though there was less issuance with 220 deals in 2014 and 273 in 2013.
"There has been a theory about debt aversion among general government issuers," Donahue said. "Now they are issuing at a faster rate than last year, as there is a decrease of supply across revenue sectors."
Utilities jumped by 10% from $2.96 billion in 73 deals, compared to $2.69 billion in 134 deals last year.
Tax-exempt issuance dropped by 9.5% to $23.99 billion in 610 issuances from $26.51 billion in 876 sales the previous March. Taxables fell by 52% to $2.23 billion in 52 deals from $4.66 billion in 118 issues.
Private placements plunged 92% with only 12 private placement deals in March this month to $106.9 million. Last March there were 73 issuances that totaled $1.398 billion.
The states that have issued the most year to date are Texas with $8.87 billion, up from $6.88 billion in March 2013 when it was third.
California came in second, dropping from first place last year as its issuance declined by 39.6%. Its volume was $7.87 billion in 2014, compared with $13.04 billion in 2013.
New York was third, falling from second a year earlier, as its issuance was almost 20% less at $7.85 billion.
Strategists said they doubt issuance will pick up much in the second quarter..
"I see it picking up marginally from where we are now, but think we'll still be down year over year by 10%," Dillon said.
"While gross issuance tends to garner the market's attention, we believe it is the net-negative story that is more significant," Carney said.
"The market shrunk by $43 billionn last year and it will shrink by a similar amount in 2014 if our math is correct," he added. "Less high-quality fixed-income assets at a time when more investors seek the asset class is a fantastic positive for technical and performance over the long term."
