Municipal market volume in the first 10 months of this year outpaced issuance from the same period of 2009, according to preliminary data from Thomson Reuters.
New borrowings last month totaled $42.5 billion, or 8.4% less than October 2009. However, volume in October 2009 was larger than any month this year or last, so the comparison doesn’t necessarily reflect any slowdown.
“Technically, the market is healthy,” said Michael Zezas, municipal strategist at Morgan Stanley. “Funds flows into mutual funds have been very strong throughout 2010 and that’s certainly supportive of increased issuance.”
Total issuance so far this year is $340.5 billion — 1.6% higher than the same period of 2009.
“Lower overall rates, tighter spreads, and some economic rebound just makes for a more favorable cost of capital for issuers,” Zezas said, while adding that there is more demand to put capital projects to work.
Data for October continues to reflect the theme of decreasing tax-exempt volume as issuers opt to access broader capital markets by borrowing through the Build America Bonds program.
The taxable issue program allows issuers to receive a 35% interest-cost subsidy payment from the federal government.
State and local governments borrowed $11.2 billion last month through the BAB program — the third-largest monthly total in its 19-month history.
Tax-exempt issuance totaled $25.7 billion in October, or 15% less than the same month in 2009.
The contribution from BABs helped taxable issuance account for $15.9 billion of volume last month, or 38% of all new issuance.
“Municipalities are issuing tax-exempts in the short end of the market and BABs in the longer end of the market,” said John Mousseau, portfolio manager and head of tax-exempt munis at Cumberland Advisors.
Because of the surge in taxable borrowing, total tax-exempt issuance has sunk to levels not seen since 2001, according to Mousseau.
The drain of tax-exempt supply has helped contain tax-exempt borrowing costs. Munis weakened in September and October, according to Municipal Market Data, after yields across the curve hit record lows in late August.
Yields on the triple-A-rated two-year scale, which bottomed out at 0.31% in late August, ranged between 0.47% and 0.48% for most of October before strengthening Thursday to 0.46%.
The triple-A-rated 10-year scale yielded as low as 2.17% in late August.
The scale weakened to 2.30% by Oct. 12 and reached a high of 2.55% last Wednesday.
Yields on triple-A-rated 30-year bonds, which bottomed out at 3.67% in late August, weakened from 3.72% to 3.86% in October.
From January to October, taxable issuance from state and local governments totaled $111 billion, representing one-third of all borrowing.
Taxable issues increased by more than 70% from the same period of 2009, while tax-exempt issuance has fallen more than 16%.
Those trends are expected to accelerate in November and December as the BAB program nears expiration at the year’s end. Muni market participants are anticipating a flood of new issuance as issuers rush to fund eligible projects.
“The amount and pace of issuance over the final two months could be volatile,” said John Hallacy, municipal research strategist at Bank of America Merrill Lynch.
Issuance should top $400 billion by year-end, possibly reaching as high as $420 billion, according to Hallacy.
The $429.9 billion record for new volume in a single year was set in 2007. Last year’s $409.9 billion was the second-largest on record.
By sector, October’s year-over-year declines were confined to three key areas: general purpose, health care, and transportation.
Borrowings for general purpose, the largest municipal bond sector, totaled
$12 billion last month, marking a 33% decline from October 2009. Health care bonds fell 38.2% to $3.5 billion, and transportation bonds fell 14.4% to $6.2billion.
The remaining seven sectors all saw more October issuance than a year ago. Large increases included education, the second-largest muni bond sector, where volume rose 15% to $9.8 billion; utilities, which rose 41.8% to $4.6 billion; and electric power, where issuance jumped 86.3% to $2.5 billion.
The largest contributor to last month’s new issuance came from state agencies and local authorities, which borrowed $14.1 billion and $8.8 billion, respectively. State agencies borrowed 11% more than in October 2009, while local authorities borrowed an additional 26.2%.
State governments issued $4.7 billion of new debt, or 61% less than one year ago.
Among credit enhancements, bond insurance remained an insignificant factor in the market.
Assured Guaranty Ltd., the only guarantor wrapping new debt, insured 144 issues totaling $2.18 billion last month, or 5.1% of all new issues. Year-to-date bond insurance totaled $23 billion, which is 29% lower than the same period a year ago.
The bond insurance industry’s resurgence became less plausible last week after Standard & Poor’s stripped Assured of its AAA rating, leaving the public finance market without a triple-A rated bond insurer for the first time in nearly four decades.
Alan Schankel, managing director at Janney Capital Markets, said insurance can still provide value to investors, particularly among retail investors seeking an extra set of eyes.
“Value comes not only from the guarantee of timely principal and interest payments,” he said, “but also from ongoing surveillance and, in the case of potential problems, workout negotiations.”
Meanwhile, other state-supported guarantees are playing a more significant role enhancing debt.
These “other guarantees” insured 143 deals last month worth $3.2 billion — outpacing the private insurance market for the fourth month this year.
