Municipal bond issuance fell 10% in the first half of 2013 after a surge in interest rates in May and June overwhelmed demand for refundings and other factors that analysts had expected to propel long-term volume for the year.
Through June, $175.6 billion in 6,378 deals reached the market against $195.4 billion in 6,994 issues through the first half of last year, Thomson Reuters numbers showed.
“There’s no question that we saw a drop-off in issuance in the second quarter,” said Justin Hoogendoorn, managing director of the strategic analytics group for the BMO Capital Markets fixed-income team. “The first quarter was fairly standard, and typically we have growing volumes in the second quarter. But this year, most of that drop-off came in May and June, where we just had the run-up in rates.”
Volume climbed 5% in the first quarter, which augured well for annual predictions of a continuation of the factors that boosted issuance in 2012: low interest rates and a spate of refundings by issuers. It wouldn’t last, as yields rocketed across the curve in May and June.
The triple-A tax-exempt 10-year yield jumped 90 basis points over the two-month period to 2.56%, Municipal Market Data numbers showed. The two-year leapt 21 basis points to 0.50%, while the 30-year yield soared 104 basis points to 3.83%.
For the second quarter, issuance fell 21% from the same period in 2012. And refundings, the driver behind the 73% jump in volume in 2012 from one year earlier, dove 19% through the first six months of 2013, to $70.5 billion from $87.1 billion.
As the rise in interest rates accelerated in May and June, it made sense that issuers might reconsider whether to refund bonds, said Michael Zezas, vice president of municipal bond research at Morgan Stanley.
“The refunding savings for issuers went down meaningfully at that point,” he said. “It wasn’t necessarily economically viable for a lot of refundings that could have come to the market to actually come to the market at that point.”
New-money deal numbers stagnated. Through the first six months of 2013, new-money issuance weighed in at $70.5 billion, compared with $70.1 billion one year earlier.
Tax-exempt volume fell 18% through June, to $146.7 billion from $178.2 billion in the first six months of 2012. Taxable volume, though, rose 90% for the first half of 2013, to $24.2 billion from $12.8 billion one year earlier.
The rates explained the rise, Zezas said. As absolute rates were at historical lows, particularly before May and June, it made sense that issuers wanted to extend out the yield curve.
“And the taxable part of the market is a good option to do that, particularly with ratios [to Treasuries] as high as they are,” Zezas said. “It also gives issuers the flexibility to do what they want with that money. So, when you’re not necessarily paying a substantial penalty to issues taxable, versus what you would tax-exempt, the extra optionality to do what you want with that money can make a lot of sense.”
Negotiated volume dropped 14% through the first half of 2013, while competitive issuance fell just 2%. Private placement volume over the span rose 43%, to $5.6 billion from $3.9 billion through the first six months of 2012.
Revenue issuance fell 13% through June. Issuance of general obligation bonds dropped 6%.
Variable-rate short-put volume fell 38% through the second quarter, while variable-rate long- or no-put issuance rose 15%. But linked-rate volume jumped 112% through the first six months of 2013 over one year earlier, to $9.3 billion versus $4.4 billion.
“That’s one area that was just about zero a few years ago,” Hoogendoorn said.
Volume through June fell among the largest sectors. Issuance for general purpose, utilities and transportation bonds dropped 28%, 26% and 7%, respectively, over the span from a year earlier. Still, volume for the largest sector through six months, education bonds, rose 11%.
The largest-issuing state and local governments mostly reduced issuance, as well. Volume for state agencies and cities and towns fell 19% and 30%, respectively. Issuance for districts and local authorities were largely flat.
In the states, half-year volume for issuers in California rose 20%, enough to push the Golden State up one spot into first place. Volume among issuers in Texas rose 1%, moving the Lone Star State up one position to second place.
New York issuers floated 39% less through the second quarter, dropping its ranking from first to third. New Jersey issuers jumped eight rankings to fourth though June 2013 on a 77% increase in volume.
Meanwhile, Illinois fell one spot to fifth place on 17% less in issuance through June 2013 against one year earlier.
Issuers in California floated three of the top-five largest deals in 2013 through June. On April 11, the Golden State issued $2.63 billion of new-money and refunding GOs.
It issued $2.47 billion in various purpose new-money and refunding taxable and tax-exempt GOs on March 14. The New Jersey Economic Development Authority on Jan. 23 floated $2.25 billion in taxable and tax-exempt refunding school bonds.