Miami — Given concerns about the economy, experts do not expect municipal bond volume to increase significantly this year following last year’s slow pace of sales.
After sales plunged to a 10-year low last year of $287 billion, volume might creep up to around $325 billion in 2012, panelists predicted Wednesday at the Fourth National Municipal Bond Summit sponsored by The Bond Buyer and Bond Dealers of America. That compares to about $400 million of new-issue volume in previous years.
With states focused on lower revenues and other budget concerns and the housing market still depressed, more aggressive borrowing will not resume until there is a “continuous cycle of economic recovery,” said Craig Noble, managing director of retail fixed income for Wells Fargo Advisors.
Because of slow growth in the economy and fiscal conservatism, new-money issuance is down, according to Mikhail Foux, a director in Citi’s municipal strategy team..
Global credit problems resulted in a flight to safety in Treasuries, “but also brought into focus fiscal austerity,” Foux said. “So we see, and continue to see, austerity in the U.S. and that’s going to be a drag at the local level.”
Across the United States, political tones are driven by uncertainty about the housing market and jobs, said Tom Kozlik, director and municipal credit analyst with Janney Capital Markets who is based in Philadelphia.
Many people expected another broad federal stimulus program in 2010 that did not occur and “fiscal austerity has been here for two years,” he said. “Companies want to understand the political landscape before going forward.”
“What I’m hearing often times from retail investors is they haven’t been as spooked with credit concerns in the news,” Kozlik said.
Most investors understand there are outlier distressed credits such as Harrisburg, Pa., where local leaders attempted to file for bankruptcy over debt related to a $310 million incinerator project, and now Stockton, Calif., where city officials are trying to restructure general fund debts to avoid bankruptcy, Kozlik said. Those situations have prompted retail investors, who still rely heavily on ratings, to ask if those ratings are up to date, he said.
Economic and political policy factors drive decision-making at the state level, said Ben Watkins, director of the Division of Bond Finance for Florida.
“I think everyone experiences the same thing to one extent or another and that is, when state and local governments have less money, we borrow less,” Watkins said. “I think less new-money issuance is a result and reflection of that.”
In Florida, state-level new-money bond sales plummeted to $200 million last year from $1 billion in previous years, he said.
From a policy standpoint, Florida Gov. Rick Scott has said he does not like using debt, and the state should live within its means without borrowing, Watkins said.
“I think we’re seeing that at the national level as well with the Tea Party rolling into Washington and deficits and debt being part of the conversation,” he said. “Southern states tend to be more conservative and other states like to finance their budgetary issues. When you are looking at structurally having less money going forward, that presents new challenges.”
Watkins said until there is a sustainable economic recovery, there will be continued reluctance to spend for capital needs.
Changes in the federal tax code, such as the proposed 28% cap on tax-exempt interest proposed in President Obama’s 2013 budget, would also drive issuance volume down, according to Foux.
The cap, if approved, would limit the benefits investors receive to the 28% tax bracket and apply retroactively.
“We’re likely to see a substantial sell-off in the municipal market” should that happen, Foux said. “Obviously, it would be a negative for issuance and more costly.”
Though liquidity is currently available from banks for short-term borrowing, Foux said investors should keep in mind the potential for rating downgrades that would bring volatility to the variable-rate demand market.
New regulations, such as changes to bank collateral requirements under Basil III in the coming years, are poised to raise issuers’ costs for letters of credit and are the reason banks now are providing LOCs with maturities of three years or less, he said.
