Municipal issuance for the first three quarters of the year is still down relative to last year, but the gap is closing quickly.
Volume for the third quarter fell 20.5% compared to the third quarter of 2010, but the numbers aren’t so bad considering issuance was down over 30% in the second quarter and over 54% in the first quarter compared to 2010.
It appears issuance is finally picking up after depressed levels earlier this year.
“The calendar is ticking away in terms of the amount of time we have left to get issues in this year,” said Duane McAllister, portfolio manager of Marshall Funds’ Marshall Intermediate Tax-Free Bond Fund. “With the decline in rates, if I’m an issuer looking at this, I’m thinking this is a favorable time to come to market. So I think the increase in supply we’ve been anticipating is here and coming.”
And the increased level of issuance shouldn’t automatically mean an increase in yields, either. “There is plenty of cash around and we are soon to be in the fourth quarter when issuance picks up on a seasonal basis anyway,” McAllister said.
Ron Schwartz, portfolio manager of RidgeWorth Investments’ Investment Grade Tax Exempt Bond Fund, said there was a lot of issuance in the fourth quarter of last year and that overweight was reflected in the first quarter of 2011 and somewhat in the second quarter, and now it finally looks like levels are getting back to normal.
So far this year, $192.9 billion in tax-exempt bonds have been issued, down over 35% from the first nine months of 2010 when almost $300 billion in tax-exempt bonds were issued. For September alone, the market saw $27.4 billion in tax-exempt money come to market, down 23% from September 2010 when $35.7 billion came to market.
Negotiated issuance is still suffering the most, with $145.2 billion coming to market so far this year, down over 40% from last year’s $244.3 billion. Competitive issuance was down over 20% to $42.2 billion from $53.4 billion this time last year.
Maintaining the top three spots for states that had the most debt issuance were California, New York and Texas, which all grabbed the top titles last year as well. Borrowers in California issued $27 billion in debt for the first three quarters of the year, down 32.6% from the almost $40 billion that was issued this time last year.
Issuers in New York came to market with $23 billion in debt, down only 10% from last year’s $25.4 billion. Issuance in Texas was down 31.6% to $17 billion from $24.9 billion.
Two of the biggest deals in September were over $1 billion, while all of the top five deals were over $500 million. The largest issue was a $2.4 billion general obligation deal from California.
A week later, the Port Authority of New York and New Jersey came to market with a $1 billion deal. Rounding out the top five were $528 million of New York City GOs, followed by $510 million of Harris County Metropolitan Transportation Authority bonds, and a $500 million GO issue from Massachusetts.
Partly due to the Federal Reserve’s Operation Twist, which pushed yields to record lows, 19 of the top 29 deals included refundings, while only 10 of the top deals were exclusively new-money bonds. As a result, refunding issuance for September was down only 18.3% compared to the year before, while new-money issuance was down almost 50% from last September. For the first three quarters, refunding is down only 18%, to $59.8 billion from $72.7 billion. New-money issuance is $99 billion, down over 46% from the $183.5 billion that was issued in the first three quarters of 2010.
The biggest sectors of borrowers were down between 20% and 50% for the first three quarters of the year when compared to 2010.
Education, the largest sector by issuance, was down 21.6% to $56.6 billion from $72.2 billion last year. Over $52 billion of general purpose bonds were issued so far in 2011, down 40% from the $87.8 billion issued last year. Utilities, the third biggest sector by issuance, was down 22% to $22.8 billion in issuance so far in 2011, down from $29.2 billion issued this time last year. Transportation and health care issuance were also down 53% and 36%, respectively.
“Issuance was down across the board and pretty much down across all sectors,” Schwartz said, adding that those numbers won’t change much. “Nobody in this economic climate wants to start new projects that aren’t truly essential,” he said.
Given the financial stress and economic climate, borrowers will postpone anything that doesn’t need to be done today. “That’s the attitude at this point and that will continue through this year,” he said.
As a buyer going forward, Schwartz said he is looking at high-quality bonds.
“We’re being more defensive and more conservative in that respect. Especially with the tough economic outlook that we’re seeing, we do think the fiscal pressures on municipalities throughout the country will continue through this year and next year,” he said.
Heading into the last quarter of the year, John Mousseau, managing director at Cumberland Advisors, wrote in a note last week that he expects muni supply to pick up. “With lower nominal rates, visible supply is starting to pick up,” he said, adding that most of the reinvestment money will go back into the market this December.
“The cheapness of muni bonds relative to Treasuries adds to the defensiveness of munis as an asset class,” Mousseau wrote. He added that with the expectation that President Obama’s proposals regarding taxing municipals won’t pass, “the muni market will return to more normalized pricing levels relative to Treasuries.”
