Tax-exempt note issuance in the first half of 2010 remained roughly flat from the same period in 2009, though it peaked in March and June, according to new data from Thomson Reuters.
Volume grew to $22.05 billion compared with $21.76 billion sold in the first half of 2009, although the number of deals brought to market fell to 1,376 from 1,482 last year.
Monthly note issuance grew, however, by a significant 74.7% in March to $2.62 billion from $1.50 billion versus the first half of 2009, and rose by 35% in June to $12.53 billion from $9.28 billion last year, the data indicated.
A seasonal supply bulge typically arrives ahead of many state and municipalities’ June 30 fiscal year-end to boost volume, noted Pamela Tynan, principal and portfolio manager at Vanguard Inc. in Valley Forge, Pa.
“Once a budget is passed, states and municipalities may finance future tax collections throughout the next fiscal year. This cash-management tool is very common, even on a historical basis,” she said.
The June uptick was preceded by a 55.7% drop in note issuance in May, which was likely before budgets were passed, other money market fund managers noted.
Overall, cities and towns sold 22.1% more note volume with 740 issues totaling $6.26 billion — 24 issues less than the $5.13 billion they brought over the same period last year. State governments were responsible for bringing 18 deals to market totaling $3 billion, a 16.3% rise over the 11 issues totaling $2.65 billion they sold in 2009.
The spread between one-year and 30-year paper tightened to 372 basis points on June 30 from 387 on Dec. 31, 2009. However, the one-year note increased slightly over the period, rising to 0.30% on June 30, up from 0.28% on Dec. 31, but dipping as low as 0.25% from Feb. 18 to March 17, according to Municipal Market Data.
The steepness on the short-end of the yield curve has contributed to ongoing strong demand from money-market fund managers as well as cash-flush retail investors looking for relatively attractive investments, municipal sources said.
“Tax-exempt money market investors are willing to go out six months or a year to pick up a relatively large amount of yield compared to daily or seven-day reset paper,” noted Adam Weigold, vice president and portfolio manager at Eaton Vance Management in Boston.
Despite the portfolio limitations included in amendments to Rule 2a-7 of the Securities and Exchange Commission’s Investment Company Act that were imposed on money market fund managers in 1940, Weigold said he has been more active in the note market as a result of the steep curve and “our firm belief that short rates will remain low for some time.”
The rule restricts investments in money market funds by quality, maturity and diversity. Under the act, a money fund mainly buys the highest-rated debt, which matures in under 13 months. Two of the amendment’s stipulations require the fund’s portfolio must maintain a weighted average maturity of 90 days or less, and a dollar-weighted average portfolio life of 120 days or less.
Weigold, who manages 14 tax-exempt mutual funds with around $1.5 billion in total assets under management, said he will continue to remain active in the note market going forward.
“I think you have a lot of retail investors who are looking for a place to park some cash in anticipation of higher rates in a year or so,” he explained. “From the issuers perspective these rates are historically low, and it still makes sense to lock in attractive, absolute rates.”
So far, investors have had ample opportunity to buy notes in the first half when two of the largest deals were sold by California issuers.
Los Angeles County sold $1.3 billion of general obligation bonds on June 11 in a negotiated deal led by Citi, while the city of Los Angeles issued $1.16 billion of GOs in a June 30 negotiated deal led by JPMorgan.
The health care sector saw a whopping 154.5% jump to $70 million, though there was just three issues, compared with $27.5 billion from eight issues in the first six months of 2009.
Amid the growth in some segments of the market, issuance involving housing, minimum-tax, and zero-coupon note issues, as well as those with standby purchase agreements, all fell to zero during the first half — a decline from just one issue each in the previous first half.
Direct issuers sold just $3.4 million among five deals, a 99% decline from eight issues totaling $357.8 million last year, while note sales with letters of credit fell 84.5% to $30.9 million with three issues, down from $199.4 million with seven issues.
Jim Randazzo, senior portfolio manager at Wells Capital Management in Charlotte, N.C., said the increase in the overall supply of notes in the first half is a welcome sight, though the slight increase “does little to offset the massive drop in supply of variable-rate demand notes.”
“VRDNs are the bread and butter for municipal money market funds and usually account for the vast majority of their composition,” he said.