Municipal-bond issuance is on pace for its lowest quarter in at least 11 years following a rush of borrowing late last year and as government borrowers struggle to get their budgets in order.
Through March 4, issuers have sold about $31.5 billion in debt, according to Thomson Reuters. The last time so little in bonds was sold by this point in the calendar was 11 years ago.
Depending on how much debt is sold this month—a figure hard to gauge since issuance calendars typically look only a week ahead—muni-bond sales in the first quarter may be the smallest amount since at least the same three-month period in 2000, which came in at $39.1 billion, according to Thomson.
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"The entire market has been amazed at the lack of volume," said Christopher Mier, managing director at Loop Capital Markets.
The lack of sales mean construction and other government-funded projects could get delayed. The slowdown is also giving investors pause about the stability of muni-bond prices, which recently recovered a bit after a sharp selloff that began late last year.
"Without more supply, you don't know how sustainable those recent pricing gains are," said Matt Fabian, managing director at Municipal Market Advisors, a research and advisory firm based in Concord, Mass. The lack of supply has hurt liquidity, he says, because bigger buyers are more reluctant to participate without large sales that can confirm price levels.
The decline in issuance has been attributed in part to the expiration last year of the Build America Bond program, which subsidized municipal borrowing. To take advantage of the program before it ended, government borrowers had rushed to sell bonds late last year.
But the demise of the program "can't be the whole story," Mr. Mier said.
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He and others cited a more-austere political environment that emphasizes spending cuts over tax increases, as well as rising interest rates. Gov. Jerry Brown in California, for example, in January proposed a moratorium on bond sales until the fall—the first time since at least 1988 that the muni market's largest debt issuer isn't expected to come to market in the spring.
"Obviously California is not alone," Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said. "Business as usual is not an option for any state or local government in these times, and that includes debt issuance."
The paucity of new bonds for sale so far this year has helped offset a lack of investor enthusiasm for muni bonds, keeping prices steady. For mutual funds focused on muni bonds, which are major buyers, withdrawals have exceeded deposits for 16 consecutive weeks, according to data provider Lipper FMI. Muni prices fell to their lowest point in two years in mid-January but have risen some since.
Some analysts say they expect sales to start picking up soon. This week's debt-sale calendar is roughly $3.5 billion, according to Thomson Reuters Municipal Market Data, about double the amount offered in recent weeks.
"It's likely there will be an uptick, but I wouldn't expect any kind of a flood," said John Miller, co-head of global fixed income for Nuveen Asset Management.
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Mr. Fabian says if issuance continues on its current trajectory, it could be as low as $200 billion this year. Some analysts project $300 billion to $350 billion in bond sales for this year, down from a record $430 billion in 2010.
Alabama County Hires Fiscal Consultant
Jefferson County, Ala., for years fighting to avoid filing what would be the largest municipal bankruptcy in history, hired FTI Consulting Inc. (NYSE: FCN - News) to help get the county's finances back on track, a county official said Tuesday.
With the potential loss of a crucial occupational tax, as well as the tremendous debt burden Jefferson County is tackling, County Commissioner Jimmie Stephens, who oversees the county's finances, said "it's necessary for us to seek this outside expertise."
The county initially will engage FTI for three weeks to help prepare a turnaround plan before Jefferson County hires a county manager later this year, Mr. Stephens said. After that, the firm will provide an estimate for a second phase to include a comprehensive recovery plan, he said. FTI will work for no fee for the first phase, though the county will reimburse the firm's expenses, Mr. Stephens said.
In the first phase, FTI will come up with three plans, one of which it will implement in the second phase, depending on what happens with the occupational tax. In the worst-case scenario, if the occupational tax does not return, a Chapter 9 municipal bankruptcy would still be an option, Mr. Stephens said.
Engaging a financial turnaround firm is somewhat unusual for a local government, illustrating the depth of the troubles facing Jefferson County, home to Alabama's largest city, Birmingham.
But some corporate restructuring firms have been pitching their services increasingly to some strained local governments. For instance, Alvarez & Marsal is joining efforts to tackle the fiscal distress of Harrisburg, Pa., the capital city struggling under an immense debt burden from an incinerator project.
An FTI spokeswoman couldn't immediately be reached for comment.
For more than two years, Jefferson County has been grappling with $3.2 billion in sewer debt, the product of soured derivatives products called interest-rate swaps.
- Thomson Reuters