Historically low municipal bond yields have prompted issuers to schedule a wave of municipal bond refundings in the upcoming month, and boosted The Bond Buyer's 30-day municipal visible supply calendar to $8.15 billion, its highest level since 1985.
The anticipated supply bulge is expected to keep prices in the new-issue market lower than those available on outstanding issues and could push total refunding volume ahead of new-money issuance this year, at least one market analyst speculated.
On Nov. 11, 1985. 30-day visible supply hit $8.19 billion as issuers dived into the market, hoping to float bond deals ahead of the enactment of the 1986 tax reform laws.
Visible supply reflects the total dollar volume of bonds and notes with maturities of 12 months or more announced for probable sale during the next 30 days. It includes both competitive and negotiated issues.
About 50%, or $4.035 billion, of anticipated issuance over the next month are refundings and, $3.9 billion, or about 48% of the total issuance, will be priced in the negotiated sector, according to statistics compiled by The Bond-buyer.
"It's all tied to refundings," said Bill Laverty, senior vice president at William E. Simon & Sons Municipal Securities Inc. "These are the lowest interest rates in years, so it just makes sense economically" to do refundings.
"We are talking about rates we haven't seen on the long end since 1978 and 1979," said George Friedlander, managing director and fixed-income strategist at Smith Barney, Harris Upham & Co. "Issuers are rushing to take advantage."
Issuers who began preparing to come to market after sizable interest rate declines in July are set to sell bond deals, Mr. Laverty said, explaining the anticipated supply deluge.
Recent market gyrations have also caused some issuers to postpone planned refundings because of negative arbitrage. This occurred because strong gains among some sectors of the Treasury market have eliminated the savings an issuer would see by refunding highcoupon bonds issued about 10 years ago. A common practice for such refundings is to invest the proceeds in short-term Treasury securities until needed.
"You do have a lot of refunding deals that were held up because there's been such a strong rally in the short end of the Treasury market," said E. Randall Smolik, senior analyst for Fundamental Data, a product of Municipal Market Data in Boston.
But if bond issuance continues at the expected robust pace, total refunding volume could surpass new-issue volume during 1992, Mr. Friedlander predicted.
Refunding volume this year has already surpassed the previous record set in 1985. That year, refundings totaled $70.8 billion. Refundings this year total $70.9 billion through August, Mr. Friedlander noted.
Mr. Friedlander estimates that through year's end, refundings could hit $100 billion or higher.
Such robust supply could present problems for the municipal market.
Market observers estimate that at least $4 billion to $5 billion of new cash will flow into the municipal market on Oct. 1, coming from sources such as bond calls, redemptions, and certificate of deposit rollovers. But those funds are not generally expected to help the,market through the near-term calendar.
Oct. 1 cash payments to municipal investors will help absorb some of that supply," but will not be enough to engulf all of it, Mr. Friedlander said.
"The Oct. 1 redemptions seem too far off to benefit the market much," said James L. Kochan, head of fixed-income research at Robert W. Baird & Co. "The new supply is coming on top of bonds that are still not distributed. Even though economic news has been great, we're going to have to wade through this calendar before we do any better."
The supply should keep bond prices, moving within narrow trading bands. This is because significantly lower interest rates would spur another round of refunding issuance. On the other side, markedly higher rates would cause a number of planned deals to be pulled from the market. And selective investor buying could cause high dealer losses.
"There's a lot of money around, but not enough that we can rally on supply," Mr. Laverty warned.
Individual investors are are currently suffering from sticker shock because the market has rebounded from recent lows, which will likely force underwriters to lower prices and raise yields on new deals.
"Guys are looking at the supply and they want to price it at where they think they can get the deal done," Mr. Laverty said. He explained that underwriters don't want a repeat of August, when secondary bond prices moved higher and caused investor demand to shrivel.
