Volume numbers in the municipal bond market have shifted so far in 2013 to reflect a stronger start in new-money issuance from recent years.
New-money deals have increased this year over the same periods in 2012 and 2011 and should continue to rise, muni watchers say.
The projects many issuers say they have put on hold for one or two years can no longer wait. And the books of many state and local governments are also recovering, leaving them better placed to fire up the earth movers.
Issuers also have political winds at their backs — there are loud cries for infrastructure improvements among politicians across the country. President Obama has made numerous calls for infrastructure, most recently in his latest budget proposal.
Ultimately, a jump in new-money issuance could push yields higher and, to some degree, discourage refundings, according to Peter Hayes, head of municipal bond portfolio management, trading and research at BlackRock. Despite other influencing factors, the municipal market remains one that is sensitive to supply.
“It will have a big impact on performance this year if that trend continues, because the demand side just is probably not going to be as robust this year as it has been,” he said. “We think there’s a chance that some of this issuance picks up later this year.”
As refunding issuance — the biggest volume story for 2012 so far — has begun to recede from last year’s flood, new money is up 20% through March, to $31.8 billion from $26.5 billion in 1Q 2012. And it’s up 17% from $27.2 billion 1Q 2011, Thomson Reuters numbers show.
To be sure, new issuance numbers are still low when compared to the same figures over a 10-year span. But the relative increase over the first quarters of the previous two years shows an issuing community that’s starting to find its footing.
Constraints on projects that were leveled on the budgets of state and local governments over the past two years, which hewed closely to an overarching theme of austerity, have borne fruit, industry watchers say. Budgets have improved.
Still, there has been a push and pull on issuers, as historically low yields favorable for issuing debt and strong demand for projects have met head-on lingering calls for tight reins on budgets.
But even as the tenor persists in some cases, it has been trumped by need, said Priscilla Hancock, managing director and muni strategist at JPMorgan Asset Management.
“The bottom line is that the governments have put off a lot of their borrowing through the crisis and post-crisis years, to the point where they can’t put it off,” she said. “So, that push-pull has come out a little more in favor of issuance, given that the economy appears to be improving and the financial picture with many issuers has begun to stabilize.”
For issuers, the economy, though appearing to improve at a snail’s pace, has provided better revenue collection to states, according to Hayes. What’s more, he added, the recovering housing market has begun to stabilize the revenue side for local governments.
Muni analysts are beginning to see evidence of budget surpluses at some state and local governments. Though not widespread, the trend is a lot better, Hayes said, which will make it easier for them to borrow for infrastructure going forward.
The timing for the uptick in new money fits from a historical perspective, said John Hallacy, managing director, manager of municipal bond research at Bank of America Merrill Lynch. For starters, he said, post-presidential-election years tend to be bigger new-money years.
Some of that has to do with the certainty of who’s in the White House and what market participants are likely to expect over the four years, as a result. In some cases, too, new governors assume their roles and start their programs.
And once in office, they might be anxious to make their presence felt.
“It’s correct to say that there’s tremendous pressure to continue to reduce expenditures and to hold the line somewhat,” Hallacy said. “But I always maintain that politicians don’t get reelected just for balancing the budget. They have to do a certain number of projects that the citizenry wants.”
Heading into 2013, analysts at B of A Merrill anticipated that new-money issuance would be heavier in the second half of the year than in the first half. The thinking held that, as rates start to ascend, issuers would be prompted to move forward on projects before rate increases accelerated.
The state of California is already ahead of last year’s pace for new-money deals, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. So far this year, the state’s new-money offerings total $2.29 billion.
Through the same period in 2012, the Golden State issued $1.89 billion of new money.
California had cut back on new-money deals for a couple of reasons, he said. For one, the state had significant budget issues it had to address before it issued any debt for new projects. The restraint represented a way to preempt any expenditures of general fund money on debt service.
In addition, Gov. Jerry Brown has been aggressive about reducing the stockpile of money the state has marked for projects. “We’ve made a concerted effort to get unused bond proceeds out to projects without having to sell new bonds,” Dresslar said. “So, there’s been no slowdown or delay of projects.”
The state expects to issue more general obligation bonds in the fall, Dresslar added.
In addition to the rise in new-money issuance, taxable volume, up 90% through March, continues its strong start to the year. Most recently, the Florida Hurricane Catastrophe Fund Finance Corp. added to the total in a big way when it sold $2 billion of taxable bonds last week.
Governments are taking the opportunity to borrow without any of the restrictions they would otherwise face with tax-exempt deals. Among those, the arbitrage restriction and the spend-down rule are the most prominent.
Issuers must spend so much money within each year to maintain the tax exemption. And any unexpended proceeds that are invested must be yield-restricted to the cost of the bonds.