The dramatic reduction of one state’s traditional cash-flow borrowing combined with historically low interest rates in the long-term market led to a 7.4% decrease in short-term tax-exempt note issuance in 2011, according to market experts.
Note issuance fell to $60.6 billion over 2,901 issues last year from $65.4 billion over 3,048 issues the previous year, according to data provided by Thomson Reuters.
But the decrease in deals overall had less of an impact on the volume decline than did the single decision by California to slash its yearly revenue anticipation note sale last September to $5.4 billion — down from $10 billion in 2010 — due to budgetary and fiscal uncertainty.
By contrast, Texas upsized its annual tax and revenue anticipation note sale last August to $9.8 billion from $7.8 billion the year before, but sources said that did little to offset the California shortage.
High demand caused the Texas deal to be three times oversubscribed at a 0.27% yield — the lowest ever on its annual short-term notes, according to the state comptroller’s office.
The absence of the California supply removed a significant chunk of paper that traditional short-term buyers, like money market funds, rely upon.
It also occurred at a time when low rates in the long-term market stole some of the thunder from the short-term playing field, a short-term muni trader noted.
“Overall, things remained relatively consistent, but the Cal notes certainly came in lower than we thought they would and that’s going to account for a large part of the decline,” he said.
Tom Galvin, managing director of the short-term products group at Morgan Keegan & Co. in Memphis, said the modest decline in short-term paper was bittersweet for the market.
“Less issuance made it more competitive in 2011,” he said. “Everybody was chasing a smaller pie … and trying to get a piece of it was tougher,” but at the same time, “the smaller market improved the bidding.”
Higher-yielding bids were evident as credit quality became more of a concern for short-term investors in 2011, according to Galvin.
For instance, both Suffolk County and Nassau County in New York were lowered to MIG-2 from MIG-1 by Moody’s Investors Service by the end of 2011, Galvin noted.
Suffolk’s downgrade postponed its $400 million tax anticipation note sale planned for Dec. 15.
But Galvin said the deal came a week later and was “was still well bid, just at higher yields.”
“People found new buyers for MIG-2 paper because it had higher yields and was more attractive, and the downgrade knocked out the money market funds,” Galvin explained.
“We saw some crossover buyers that got involved when short–term credit quality deteriorated,” a short-term trader in New York said.
Demand was still strong even though some of the those attractive yields came anywhere from 10 to 40 basis points tighter than where they would have been in 2010, sources said.
Meanwhile, much of the scarcity was brought on by the California note offering, which came on the heels of a rally in the long-term muni market, the first trader noted.
“The MMD scale was getting bumped every day,” he explained. “I didn’t see the big deals reflective of what we had been seeing overall in the marketplace, and didn’t see a whole lot of new issuers.”
The benchmark 10-year municipal bond yield fell to a record low of 2.09% back on Sept. 7 — a 15 basis point-drop from where it had been on Sept. 1, according to Thomson data.
Likewise, the 30-year bond yield fell two basis points to 3.68%, while the two-year held at 0.30% for 20 consecutive sessions — its lowest level in more than 40 years.
Even though long-term volume fell 32% — to $294.6 trillion in 2011 from $433.2 billion in 2010 — the short-term market suffered noticeable losses.
Letter of credit-backed debt dropped 40.9% to $1.2 billion in 11 deals last year from $2 billion in 18 deals in 2010, while a 49.4% decrease in bank-qualified issuance resulted in $4.8 billion over 1,862 issues versus 2010’s $9.4 billion total in 2,288 deals.
The scarcity also created slim pickings among some sectors, like electric power, which dropped 92.9%, falling to just $44.7 million among 16 deals from $633.9 million in 21 deals in 2010.
Meanwhile, there was some growth.
The District of Columbia exhibited a 60% increase in note volume, rising to $1.12 billion over two issues, up from one $700 million sale in 2010.
In addition, the growth of private placements to $5.6 billion in 48 deals from just $307.2 million in 42 issues in 2010 contributed to scarcity in other segments of the short-term market and was one of the very few in that market that saw issuance spike, the New York trader noted.
“Issuers continue to look at private placements as an alternative to the open market,” he said.
Meanwhile, concerns over banks’ credit quality prompted variable-rate debt to fall by 19.5% to $20.10 billion in 289 issues, from $24.96 billion in 421 issues.
“As 2010 and 2011 rolled through there continued to be heightened concern over the quality of banks,” the New York trader said. “Investors in this space were consistently looking for access to good quality credits that weren’t exposed to banks.”
