Low issuance, low defaults and low rates

For issuers, conditions are just about perfect in muniland now. Many have defered or withdrawn planned bond offerings, leading to greatly reduced supply for the year. Bloomberg estimates that 3rd quarter total issuance will be about $67 billion. This follows the $117 billion in muni securities issued in the first half of the year (data from SIFMA, Excel file link). Through Q3 Billions 2010 $ 298 2011 $ 184

Defaults have also been puttering along at very, very low rates. This is due to some creative workout solutions, like Jefferson County’s negotiations with creditors, and many instances of postponement of problems, like Collingswood, NJ. I’ve seen estimates for total defaults for the year ranging from $1.8 billion (this number included unrated bonds) to $1.1 billion. Bloomberg says:

Municipal defaults have dropped this year to about $1.1 billion, a quarter of last year’s total, according to Bank of America Merrill Lynch. Local general- obligation bonds have accounted for only 1 percent of the 2011 failures [balance is revenue or conduit bonds].

The biggest benefit for state and local governments issuing debt is low rates. Low interest rates allow an issuer to bring bonds to market and pay a lower rate for the term of the bond — up to thirty years. Conversely this is bad for municipal bond investors who would like to receive higher rates for loaning money to state and local governments. One reason for low rates is that municipal interest rates tend to track U.S. Treasury rates, and those have tumbled with the European debt crisis. Secondly, there has been so little supply of new issuance that strong demand has driven rates down. Strong demand happens, in part, because yields on municipal bonds are still higher than yields on bank certificate of deposits or cash. Bloomberg one more time:

Yields on top-rated 10-year municipals were 2.02 percent yesterday after falling to 2 percent on Sept. 23, the lowest level since 2009, when Bloomberg records for the debt begins.