Muni Issuance May Fall to $280 Billion in 2014, Friedlander Says
Issuance in the $3.7 trillion U.S. municipal market may fall to $280 billion in 2014, the lowest since 2011, said George Friedlander, chief municipal strategist at Citigroup Inc.
Localities have issued $255 billion of long-term debt this year through Nov. 1, down 15 percent from last year’s pace, data compiled by Bloomberg show. New York-based Citigroup forecasts $325 billion of sales for 2013. The bank’s projected tally for next year would be the second-smallest total since 2005, the data show.
“We’re looking at a rather modest calendar,” Friedlander said today at the Bloomberg Link State & Municipal Finance Conference in New York. “Refundings will just continue to dwindle.”
Municipalities are hesitant to take on new projects after the worst recession since the 1930s ended more than four years ago, even as cities project their first revenue increase since 2006. Local governments nationwide asked voters yesterday to approve about $18 billion of bonds for schools, hospitals and streets, less than half the 2007 record for an off-year election.
Volume has also dropped as refinancing has proved less economical after interest rates rose from generational lows. Benchmark 10-year yields are about 2.68 percent, compared with as little as 1.52 percent in December, Bloomberg data show. Refunding sales made up more than 60 percent of issuance last year, the data show.
Friedlander joins Phil Fischer, head of muni research at Bank of America Merrill Lynch, in forecasting fewer new bonds. Fischer said in an Oct. 4 report that issuance will total $330 billion in 2014, about the same as this year. That compares with $408 billion of sales in 2010, the biggest yearly amount since at least 2003.
The prospect of changes to the tax-exemption on municipal debt is keeping the securities cheaper than they should be given the muted supply, said John Dillon, chief muni strategist at Morgan Stanley Wealth Management.
The ratio of 10-year muni yields to those on similar-maturity Treasuries, a gauge of relative value, has been above 100 percent since June, Bloomberg data show. It compares with an average of 94 percent since 2001. The higher the number, the cheaper munis are compared with federal securities.
The figure should be around 90 percent given the decline in bond sales, Dillon said.
There’s “fair value” around 93 percent to 95 percent, he said.
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