Geopolitical risks and the municipal bond investment opportunities (Part 6 of 10)
Refunding versus new capital issues and taxable versus tax-exempt issues
In the last section, we discussed municipal bond issuance in Q1 2014 in terms of negotiated sales and private placements. In this section, we will discuss issuance in terms of other muni bond features such as refunding versus new capital issues and taxable versus tax-exempt issues.
Refunding on a declining trajectory
Refunding volumes declined in the first quarter of 2014 to ~51% of total issuance. The ratio was ~63% in Q1 2013 and has averaged ~39% over the period 1996-2013. Total refunding volumes at $31.8 billion in Q1 2014, were also down by almost 40% compared to the same period of 2013. This is mostly due to higher interest rates this year compared to last year. The Bond Buyer GO 20-Bond Municipal Bond Index yields increased from 3.68% on January 3, 2013, to 4.75% on January 2, 2014.
Interest rates were on the up since May last year, since the Fed hinted that it was considering winding down its monthly bond buying program consisting of longer-term Treasuries (TLT) and agency-backed securities (MBB). The Fed had embarked on the program in order to boost economic growth and improve the labor market, in the aftermath of the 2008 financial crisis and Great Recession. Although the taper actually started in December 2013, yields started rising much earlier in anticipation.
To learn more on how bond markets anticipated the taper, read Why interest rates reacted little to the Fed’s taper announcement.
In one of the largest deals in the year, the Texas Transportation Commission issued $1.46 billion in revenue bonds, which were partly refunding and partly new issue. Piper Jaffray (PJC) was the lead underwriter for the AAA-rated issue.
Taxable and tax-exempt issuance
Tax-exempt (TFI) issuance in Q1 2014 declined by ~16% and ~21% quarter-over-qaurter and year-over-year, respectively, to $53.6 billion. Taxable issuance came in at $5.5 billion, declining by ~16% and ~49% quarter-over-quarter and year-over-year, respectively. AMT issuance at $1.3 billion, recorded the largest decline – 55.2% and 47.6% on a quarter-over-quarter and year-over-year basis, respectively. A prominent taxable issue in Q1 2014, was the $402 million Illinois taxable, high-grade revenue bonds. The competitive bid for the bond issue was awarded to J.P. Morgan (JPM) for a true interest bid of 4.2706%.
The State Street SPDR Barclays Municipal Bond ETF (TFI) is an ETF providing exposure to tax-free municipal bonds. TFI tracks the Barclays Capital Municipal Managed Money Index. The Index is a rules-based, market-value weighted index engineered for the tax exempt bond market. All bonds in the National Municipal Bond Index must be rated Aa3/AA- or higher by at least two of the following statistical ratings agencies: Moody’s, S&P, and Fitch. TFI assets are composed of both GO and revenue bonds.
To know about other key trends in the municipal bond market for states in Q1 2014, read Part 7.
Browse this series on Market Realist:
- Part 1 - When geopolitical risk takes precedence over interest rate risk
- Part 2 - Municipal bonds in 2014: General obligation bonds down but not out
- Part 3 - Revenue bond issuance in 2014: Why were the issuers market-shy?
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