Municipal bond volume in January surged from the same month last year, driven by refundings as issuers took advantage of lower interest rates.
Long-term municipal bond issuance increased 38.7% to $27.08 billion, the sixth monthly gain in a row, as refundings more than tripled to $15.39 billion from $4.72 billion in January of 2014, Thomson Reuters data show.
Municipal bond pros said the increase in refundings reflects a rate environment that allows issuers to save money by replacing bonds issued when borrowing costs were higher.
"From December 2013 to December 2014, we have moved somewhere around 133 basis points in the 30-year and 73 basis points in the 10-year," said Jim Colby, chief municipal strategist at Van Eck Global, referring to declining yields in the Municipal Markets Data triple-A scale. "We are in fertile ground for refunding opportunity up and down the curve, and it's a welcome increase in volume. Last year at this time we were struggling for new issuance to replace bonds that were called and matured from their 10-year date."
When the Federal Reserve does decide to raise rates, it will certainly affect the market - especially the refunding bonds. However, according to Colby the impact might only be temporary.
"Because it has been long anticipated that the FED will raise rates, everyone is prepared for it," said Colby. "I think it might have less impact than people thought a year or two ago. If the FED makes a modest move, let's say 25-50 basis points that would still leave the market plenty of room to maneuver. I would estimate we have 4 to 6 months of continued good volume accompanied by refunding."
New-money issuance dropped 28.3% to $8.40 billion, from $11.72 billion in January last year. Negotiated deals increased 74.7% to $21.11 billion in 481 deals from $12.08 billion in 376 deals for January of last year. Competitive deals declined 8.5% to $5.59 billion from $6.11 billion and private placement deals dropped 71.9% to $375 million from $1.33 billion.
Tax-exempt bonds surged 50.6% to $25.52 billion in 689 deals from $16.95 billion in 598 deals.
Fixed rate deals improved by 38.2% to $25.63 billion in 713 deals from $18.54 billion in 618 deals.
Sectors that fared well in the month of January include transportation, healthcare and education. Transportation showed the biggest gain of the month, increasing by 101.6% to $5.51 billion from $2.73 billion, healthcare was up by 51.4% to $3.03 billion from $2.00 billion and education rose 35.8% to $7.71 billion from $5.68 billion.
"Transportation is a core infrastructure and you read so much about roads, bridges and highways and I was happy to see that the sector almost doubled," said Alan Schankel, a managing director at Janney Capital Markets. "It is a growing part of the volume, and if they raise the tax gas it will be leveraged into more bonds that will trend will continue. Also I believe because of turnpike issues, those revenues are likely to increase somewhat because there will be more traffic now that gas is cheaper. That should equate to more driving and more vacation for families. Lower gas has an impact on a lot more things."
Natalie Cohen, a Managing Director at Wells Fargo Securities, said the figures mask differences between higher education and K-12.
"On a dollar basis, the education sector is strong, but not on percentage basis," said Cohen. "Where the recovery in the sector has taken place is at the local level and mainly school districts, because more school districts are getting in on the universal pre-K that increases headcounts and those are factors that I would say are different from last year."
Revenue bond volume climbed 51.6% to $17.04 billion from $11.24 billion, while general obligations bonds saw a smaller improvement of 21.2% to $10.03 billion from $8.28 billion.
"Revenue bonds are strong and have good quality and are less racked up in some of the fiscal problems that GOs have had, which is another change that has taken place over the last year or so," said Cohen.
Sectors on the other end of the spectrum included development and public facilities. Development issues decreased 78.2% to $336 million from $1.54 billion, while public facilities bond volume dropped 13.6% to $924 million from $1.07 billion.
State Agencies issuance almost doubled to $10.19 billion from $5.23 billion and colleges and universities increased by 108.7% to $1.09 billion from $526 million.
Issuance by local authorities decreased by 31.2% to $2.24 billion from $3.25 billion.
Issuance with bond insurance increased by 29.4% to $958 million from $740 million.
The top five state issuers this past month were Texas, New York, Washington, California and Florida. New York and Texas flip-flopped from their rankings in January of 2014, while Washington jumped from eighth in January of 2014. Texas issuance increased 63.2% to $4.07 billion from $2.49 billion, while New York's deals decreased by 8.2% to $3.19 billion from $3.47 billion. Washington almost tripled its issuance $2.38 billion from $861 million.
Historically, January is a slower month in terms of volume. Schankel believes this is a sign of good things to come.
"In general, I didn't think January would be quite this robust," said Schankel. "Things usually ramp up more slowly and I think this busy January bodes well for increased volume for the rest of the year."
