Why was muni trading down in the third quarter?

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WASHINGTON – Municipal market trading totaled only $661.0 billion in the third quarter of this year, 21% below the same quarter last year and the lowest level reported since the first quarter of 2016, according to the Municipal Securities Rulemaking Board.

The findings are in the MSRB’s third quarter statistics report issued on Tuesday, which doesn’t interpret the statistics.

Matt Fabian, a partner and head of market and credit research at Municipal Market Analytics, said he is not surprised at the trading level, even though he has not read the report.

He pointed to several factors.

First, he said, there’s a decline in muni issuance.

“Primary issuance was down $56 billion year-to-date through Friday and that’s because of fewer refundings,” he said. There’s a smaller universe of refundable bonds, partly because of a decline in fixed-rate bond issuance in 2007 as the financial crisis was unfolding, he added.

Also a lot of debt was refunded last year ahead of the November elections to address the risk that rates might rise afterward, he said.

There’s been a continued shrinkage in the variable rate demand obligations and therefore, fewer weekly resets, he said.

VRDOs are being replaced by three-year bank loans. Banks have more of an incentive to directly buy munis than provide issuers with letters-of-credit for them because of federal requirements that they set aside money for liquidity facilities.

There is also minimal actual trading “because supply is relatively scarce and yields are so low,” Fabian said. “There’s more reinvestment risk. With the supply and demand in the market, investors are less confident that they can invest the money that they get from selling their bonds.”

John Mousseau, executive vice president and director of fixed income at Cumberland Advisors, agreed with Fabian but added, “It’s just the market settling into low nominal interest rates” after the craziness of the market after the November elections.

“You’ve got lower rates, lower credit spreads, and a flatter yield curve: that’s a recipe for less activity,” he said.

MSRB found the total number of trades rose 7% to 2.29 million trades during the quarter from 2.15 million from the third quarter of 2016.

The most actively traded muni during the quarter was a tax and revenue anticipation note from Texas, with 2,219 trades at a par amount of $6.4 billion, according to the report.

The number of VRDO rate resets declined to 102,510 in the quarter, compared to 117,495 in the previous third quarter, the report found.

The number of continuing disclosure documents received by the MSRB totaled 30,869 during the quarter, down from 32,872 in the third quarter of 2016.

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