A massive jump in refundings pushed long-term municipal bond volume up significantly through the first half of 2012.
Issuance rose 65% through this June against the first six months of 2011, with refundings soaring 145% over the same span.
Total long-term volume measured $192.9 billion in 6,888 issues through June, according to Thomson Reuters numbers. That compares with $117.0 billion in 4,859 deals in the first six months of 2011.
For refundings, the numbers are even more dramatic, with $86.0 billion floated in 3,440 issues. That compared to $35.1 billion in 1,495 issues. As refunding volume has risen to 45% of all issuance for the first half of the year versus 30% of issuance over the same period in 2011, the numbers distort overall volume numbers, said Duane McAllister, a co-manager of the BMO intermediate tax free fund at BMO Global Asset Management U.S.
“It gives a false sense of this huge increase in supply that isn’t really the case, assuming that a big chunk of the issues that got refunded went back into the market to reinvest,” he said. “I don’t know how much of that you can assume — I think a fairly good amount of that debt.”
The economy has been a picture of sluggish growth in 2012, suggesting a limited need among issuers to borrow. What’s more, municipalities have been pressured to continue their policies of austerity.
Subsequently, issuers have been looking to take advantage of the record-low rate environment. The conditions are ideal for refinancing deals, which industry pros predict should continue through the rest of 2012.
However, the rate of monthly volume increases has been slowing, wrote John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney, in the firm’s midyear review. It had accelerated to as high as a staggering plus-117% on a year-over-year basis in April, but has since steadily faded to plus-74% in May and plus-34% in June.
“The aforementioned outsized year-over-year increases are the result of comparing this year’s data to the exceptionally low levels of issuance throughout the first half of 2011,” Dillon wrote. “We believe these year-over-year percentage gains will continue to diminish, as year-to-date, year-over-year comparisons are made to more normal levels of issuance from the second half of 2011.”
And allowing for continued momentum in refundings, as well as the bump in new money issuance, MSSB revised its full-year supply estimate higher to up to a 25% increase.
The slew of refunding deals has also flattened the yield curve, said Ashton Goodfield, a portfolio manager with DWS Investments. This is because borrowing for new, large capital projects that will exist for decades typically involves floating bonds that are issued at the long end, such as 30 years. For refundings, though, she said, a lot of supply tends to be issued a little shorter.
“When you have less supply in the long end, that can result in the flattening of the yield curve,” Goodfield said. “That’s certainly been the case year to date, and beyond.”
Among sector issuers floating the largest amount of bonds for the first half of the year, the numbers year over year are higher across all categories. General purpose saw an 84% increase over the period. Utilities rose 114% over the period, transportation jumped 66% and education rose 43%.
Refunding bonds made huge leaps as part of sector issuer volume. For the largest of the aforementioned issuers over the year’s first six months, refinancings saw increases of 253% for general purpose, 191% for utilities, 116% for transportation and 99% for education.
Among the largest government-level issuers, state agencies jumped 82% over the first six months of the year, versus the same period in 2011. Districts jumped 68%, cities and towns rose 80% and local authorities 26% over the period.
The amount of refunding deals among the largest government-level borrowers also grew. State agencies increased 153%, districts rose 144%, cities and towns jumped 152% and refundings by local authorities swelled 88%.
But new money has also seen a boost in issuance through the first six months of 2012 over the same period one year earlier. Such deals rose 11%, to $69.2 billion in 2,861 issues, against $62.4 billion in 2,924 deals in the first six months of 2011.
Tax-exempt issues rose 79% through the first six months of the year compared with the same period in 2011. Taxable issues, however, fell 21% over the same period.
The amount of negotiated deals jumped 74% through this June, compared with the first six months of 2011. The market also saw more in competitive deals, which were up 52% over the period.
There were more in revenue and general obligation issues through the first six months of this year, compared with the same period in 2011. Revenue deals were 60% higher over the period and GO deals totaled 73% more.
For the first half of the year, 15 deals weighed in at $1 billion or more. Of those, eight were refundings, including the two largest, and four of the top six.
The Michigan Finance Authority led the pack. On June 13, it brought to market $2.92 billion of general-purpose refunding bonds.
Puerto Rico followed with $2.32 billion of refunding GOs priced on March 7 by Barclays. California placed third with $1.90 billion of state GOs comprised of both refundings and new money.
