Long-term municipal bond volume was down in 2013 as the amount of refunding deals in the market slowed substantially, particularly during the second half of the year.
Total volume during the year dropped 12.5% to $334.6 billion in 11,435 issues from the previous year's $382.4 billion in 13,129 issues, according to Thomson Reuters.
Though issuance was low for the entire year, it didn't start out that way.
"New-issue volume was robust at the beginning of the year, as new money, refundings and taxable offerings all posted stronger numbers versus historical averages," John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management, wrote in a research report.
January — typically a slow month — began the year with 897 issues totaling $27 billion. That amount was up 54.8% from the same period the year before.
After February, when issuance totaled $24.6 billion, supply averaged roughly $28 billion per month for the remainder of the year. Issuance peaked in April when issuers brought $38 billion to market — a 9.9% increase from the year before.
"New-money issuance remained elevated as state and local government austerity eased and initiatives surfaced to address deferred maintenance," Dillon said. "Meanwhile, low nominal interest rates bolstered refunding deals."
He added that many issuers even turned to taxable debt to refund existing securities a second time, while still clipping savings.
Taxable deals totaled $38.4 billion in 1,215 issues — up 16.8% from 2012. All tax-exempt deals, which totaled $285.9 billion, were down by 15.1% from last year.
"Compared with 2012, there was a notable increase in taxable issuance of health care and education," Citi analysts George Friedlander, Mikhail Foux and Vikram Rai wrote in an end-of-year report. "These two sectors should remain main drivers of taxable supply for the next several years."
Citi analysts expect the marginal but steady increase of taxable supply to continue, and forecast a 10% or greater increase in taxable issuance in 2014 to a total of $41 to $45 billion.
In August, total new issuance dropped 31.9% from 2012 to $22.8 billion. Year over year declines continued each month during the remainder of the year.
"The second half of the year told a very different story," Dillon said. "In a word, 'taper' was the reason for the difference."
Following Federal Reserve chairman Ben Bernanke's mention in June of possibly tapering the Fed's bond-buying program by the end of the year, the tax-exempt market sold off, following Treasuries, and interest rates started to climb.
Yields on the Municipal Market Data scale ended the month of June more than 40 basis points higher than in May. Five-year yields were up 46 basis points to 1.40% on June 28, up from 0.94% on May 31. The 10-year yields were up 47 basis points to 2.56% from 2.09%.
Issuers began to postpone deals due to market volatility and many potential refunding deals were shelved.
Total refundings for the year were down 29.1% from last year at $112.3 billion in 4,351 issues. That followed $158.2 billion in 6,219 issues in 2012. New money was up 8.4% with $161.3 billion in 6,015 issues.
Combined new-money and refunding deals were down 19% with 1,069 issues totaling $61.1 billion.
Among the sectors, only development and housing bonds increased issuance from last year, by 8.1% to $12.2 billion, and by 29.8% to $14.1 billion, respectively.
Bond issuance in the utilities sector dropped 27.6% from last year to $33 billion. Health care bond issuance declined by 22.8% to $28.8 billion and general purpose bonds were down 20.9% at $79.8 billion.
Negotiated issuance was down 17.6% at $243.8 billion, compared with $295.9 billion in 2012. Competitive issuance was also slightly lower last year at $69.3 billion — a 6.4% decline.
Issuers sold $206.7 billion in revenue bonds — down 16.1% from 2012. General obligation bond sales were also down 6% at $127.9 billion.
Fixed-rate issuance dropped 14.1% to $296.7 billion. Variable-rate short bond issuance was also down by 19.4%, while variable-rate long or not-put issuance was up 78.2% at $4.3 billion.
Among states and local governments, each type of entity saw declines in issuance, with the exception of colleges and universities and cooperative utilities.
Colleges sold $14.2 billion of debt — up 14.3% from 2012, while cooperative utilities sold $125.6 million — up 131.7%.
State agencies sold $94.9 billion of bonds in 1,170 issues, which was an 18.5% decline from the year before. Cities and towns issued 23.5% less than last year with 3,231 issues totaling $44.9 billion.
Analysts are projecting that 2014 will be an even bleaker year than 2013 in terms of new issuance.
Citi analysts are estimating that new-issue volume will decline to $315 billion at the end of the year. Morgan Stanley is also projecting issuance will drop by somewhere between 8% and 12%.
Michael Pietronico, chief executive officer and senior portfolio manager at Miller Tabak Asset Management, said his firm sees forecasting supply as a function of one's view of the direction of interest rates.
"Given that the perception in the market is for interest rates to trend higher, it seems likely in our view that supply could surprise on the lower end of many firm's projections," he said. "Refunding deals of any great magnitude are likely to be few and far between and as such we are taking the approach here of putting cash to work as supply should be difficult to find — especially in the summer months."
