Momentum from the record fourth quarter carried rolled through the holiday lull this year, driving out $29.2 billion of public debt sales last month — the most ever for a January, according to Thomson Financial.
Sales during the second and fourth weeks of the month accounted for the lion’s share of deal-making this January, which started the year off 55.6% ahead of the 2006 pace. Together, these two weeks comprised about $21 billion of the total.
“The math is working for refundings,” said Bruce Floberg, lead senior municipal strategist at RBC Capital Markets. Floberg added that RBC is doing several refundings in Texas that now make sense, even though they did not last year when the yield curves were similar to where they are now.
New money and refundings both fueled the increase last month. State and local governments sold $18.6 billion of new obligations, a 66.8% increase from last January. They refinanced a further $7.7 billion, a 69.3% jump. Combined offerings, in which the issuers did not specify ahead of time the share of new and refunding money in their bond sales, dropped to just $2.9 billion, Thomson data showed.“Overall, rates are still low, and it’s attractive for issuers to issue bonds right now, especially high-yield bonds,” Floberg said. He noted that the spreads between yields on triple-A bonds and those of riskier credits are extremely tight.
But some strategists said the continual volleys of bond sales are likely to slow in the coming months.
“Rates had dropped dramatically going into the end of the year,” said Peter DeGroot, head of the municipal index and strategy group at Lehman Brothers. “It wasn’t really until the middle of January that the rates breached the 4.70% mark for 10-year Treasury. I think as we continue in the 4.80% to 4.90% range on the 10-year, and the curve remains in its current state, then we should see refundings taper off.”
DeGroot added that it is likely that most of the deals had been in the pipeline for a while and just happened to come to market all at once.
Education bonds, typically the most popular type of public debt sold, picked up 54.2% from the amount sold in January 2006, as $9.5 billion went to market last month. Analysts said several factors might have contributed to this increase.
It is partly a reflection of school districts’ ongoing race to upgrade and modernize infrastructure, DeGroot said.
The sharpest relative drop in volume came in housing bonds, as only $790 million were sold last month. This represented a 53.2% drop from the same month of 2006, as the rate environment started to make housing bonds one of the big stories of last year.
Nine of the month’s 20 largest deals sold last week, including the $3.6 billion refunding of New Jersey Tobacco Settlement Finance Corp. bonds that Bear, Stearns & Co. priced on Jan. 24. It was the second attempt to refund debt the state sold in 2002 and 2003, as lawmakers had stalled the first refunding attempt just before it was set to sell in August 2005.
Republican lawmakers again took issue with the tobacco refunding last month, and bankers restructured the deal to eliminate all bonds with maturities longer that 35 years. After this last-minute shifting, they then re-priced the deal, apparently unable to find adequate demand at the original yield schedule. The underwriters took as much as five basis points of yield, along with some volume, out of the shorter maturities to focus more on the longer maturities. They also added two basis points of yield and $160 million of volume to the 35-year maturity. Market yields were already on their way up by Jan. 24, and average yields on 30-year maturities of triple-A general obligation bonds had increased three basis points — to 4.15% from 4.12% — since the beginning of the week, according to Thomson. Supply from the New Jersey tobacco deal helped push yields up even further, and the yields on triple-A GOs averaged 4.19% when measured the day after the sale.
Bear Stearns is scheduled to help price a $3.5 billion refunding for California’s Golden State Tobacco Securitization Corp. during the coming months.
The most common source of muni bond sales — state-level agencies — accounted for $9.8 billion of the overall volume last month, an 88.2% increase from last January. The jump might represent the results of the November general elections.
“It’s possible that with the election bringing favorable bond results — a high percentage of approvals with a fairly heavy slate —maybe you’re beginning to see that already at the state-agency level,” said Chris Mier, managing director at Loop Capital Markets LLC.
One of the surprises last month was the lack of volume from Florida, the fourth-busiest state for public debt sales during 2006. None of the 20 largest deals last month came from Florida, and issuers there sold only $882.1 billion of bonds, making them the 10th busiest state for issuers during January.
“It’s almost like people wanted to catch their breath for a period of time,” said RBC’s Nate Eckloff, a managing director and banker who works on Colorado- and Florida-based credits. “The timing coming out of ’06 was that the issues were, for the most part, hitting the market in February and March. I didn’t have anything targeted in January — not any large issues.”
Conscious of how the rate of muni volume changed in 2006 from its initially slow start, though, strategists said it’s too early to revise their projections for year-end volume in 2007. But the record January had some thinking that debt financing could be more popular this year than they first thought.
“I don’t know what it portends for the year, but maybe some of the guys with higher projections were on to something we missed,” Mier said.
