Consistently low interest rates and a sputter-spurt economy sparked an almost unprecedented amount of bond sales in the first half of this year as long-term volume jumped 29%, to $146.71 billion from $113.76 billion in the same period a year ago, according to Securities Data Co.
Bond sales for the first half of 1993 constituted the second busiest half-year on record, trailing the $148.46 billion sold in the second half of 1985, when issuers bombarded the market in anticipation of stringent tax reform. This year's second and first quarters, with respective sales of $80.49 billion and $67.19 billion, were the second and third busiest quarters ever, but they trailed well behind the $110.16 billion total for the fourth quarter of 1985.
Short-term note sales, which spent the first quarter in a serious slump when compared with 1992 levels, came roaring back in the second quarter and finished the first half at $23.67 billion, up 21% from $19.6 billion in the first six months of 1992. Issuers sold $12.16 billion of notes in June - the second-highest monthly total ever, behind the $12.84 billion sold in September 1992.
Interest rates have so far played a significant role in this year's flood of bond sales. The Bond Buyer's 20-bond general obligation yield index has been below 6% since Feb. 11, reaching a 14-year low of 5.47% on March 4 and finishing the first half on July 1 at 5.55%.
Low interest rates convinced many large issuers that it was time to refund the high-coupon debt sold in the early 1980s. The 20-bond index averaged 11.64% in 1982, 9.51% in 1983, and 10.10% in 1984.
As a result, refunding volume surged 73% in the first six months of 1993, to $96.26 billion from $55.6 billion the year before and accounted for two-thirds of this year's new-issue volume. The surge in refundings more than made up for a 13% decline in new-money issuance, to $50.44 billion from $58.17 billion.
Nor has the market's torrid pace shown many signs of cooling off. Issuers sold $29.61 billion of bonds in June, virtually the same as the year's high of $29.63 billion in March.
"June was heavily influenced by anticipation of the huge coupon run-off," said Robert Chamberlin, senior vice president of municipal research and marketing at Dean Witter Reynolds Inc. "But even so, the numbers are simply awesome. We're still at or close to June's yield levels. We may still have a couple of more months to go with these refundings."
Looking at these figures, I'm inclined to ask, ~Has refunding crowded out new money?'" said George Fischer, a portfolio manager with Fidelity Investments. "I'd say it has caused a decline in new money as issuers concentrate more on getting the refundings done.
"Once refundings dry up, and they will dry up, new money will pick up," Fischer said. "There are enough projects going on around the country to justify the issuance. Will it make up for current levels? No, not by a long shot. When the refundings go, issuance will probably be down about 30% from current levels."
Guy Davidson, a portfolio manager with Sanford C. Bernstein & Co., agreed. Right now, new money is one-third of the new-issue market, and is at about a $100 billion pace for the year. It's averaged about $110 billion over the past three years. If rates rise or all the refundings finally get done, issuance numbers will be way down," he said. "Even with a 10% to 15% increase in new-money, new-issue volume could plummet over the next few months once that's happened."
All but two of the specific-purpose categories showed increases through the first six months. Electric power bond sales posted the most dramatic gain, rising 157%, to $17.01 billion from. $6.61 billion. Refundings accounted for a whopping $15.11 billion, or 89%, of the electric power total.
Among other sectors, education bond sales gained 14%, to $23.56 billion from $20.62 billion. Utilities Jumped 60%, to $18.9 billion from $11.85 billion. Health care increased 44%, to $15.55 billion from $10.82 billion. Transportation rose 21%, to $15.5 billion from $12.77 billion. Public facilities soared 78%. to $6.86 billion from $3.85 billion, and environmental facilities rose 26%. to $4.52 billion from $3.6 billion.
The catchall "general-purpose" category rose 21 %, to $35.25 billion from $29.11 billion, in the first six months of 1992.
The two exceptions were housing bond sales, which plunged 42%, to $6.06 billion from $10.38 billion; and industrial development, which fell 16%, to $3.5 billion from $4.15 billion.
Andrea Bozzo, senior vice president with Fitch Investors Service, offered an explanation for the growth in transportation financing: "It's a combination of two primary reasons. First, there are the refundings, [which accounted for $9.94 billion of the transportation total] ... But there's also been a need for infrastructure funding that has built up and been deferred over time. "
The lower interest rate environment has made it more feasible to take on such projects, Bozzo said.
The use of bond insurance to enhance municipal issues continued to rise faster than overall volume -- leaping 46%, to $58.05 billion, or about 40% of the first-half volume, from $39.74 billion and a 35% share in 1992.
Other credit enhancement has not fared as well. Bonds backed by bank letters of credit were down 14%, to $3.98 billion from $4.62 billion. Bonds secured by insured mortgages or collateralized by mortgage securities plummeted 69%, to $1.03 billion from $3.32 billion.
In the short-term note market, the three sectors accounting for most of the $4 billion increase from the first half of 1992 were general-purpose issues, rising $2.42 billion, or 16%, to $17.54 billion; utilities, which gained $910 million, or 349%, to $1.17 billion; and education, up $440 million, or 13%, to $3.89 billion. The sector got a considerable boost in the second quarter, when California sold $3 billion of notes on April 20 and $1.4 billion on June 16, and Los Angeles County sold $1.5 billion on June 22.
Securities Data's volume figures are preliminary and subject to substantial revision. For instance, June's figures were revised to $29.61 billion from $27.87 billion since they were first published in The Bond Buyer on July 2. EDITOR'S NOTE
The new-issue volume figures and rankings in this supplement were compiled by The Bond Buyer's statistics staff from Securities Data Co.'s municipal bond data base on July 10-12, unless noted otherwise in the footnotes.
The Decade of Municipal Finance and Long-Term Bonds tables were compiled on July 13. As a result, there are some unavoidable discrepancies in the 1993 data between those tables and the purpose tables compiled on July 10-12, because Securities Data Co. updates its data base daily during the week. The data compiled on July 13 are considered more accurate.
Long-term bond figures and rankings are based on issues maturing in 13 months or longer. Short-term note figures and rankings are based on issues maturing in 12 months or less. Private placements are included in new-issue volume totals but not in the rankings. Remarketings are excluded from all new-issue volume figures and rankings. Municipal forward sides have been included according to the date that the sale was completed rather than the delivery date.
Because the data in this supplement were compiled on July 10-13, they exclude municipal bonds that were sold in the first half of 1993 but were not reported to Securities Data by July 12.
The information in Securities Data's data base was obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Securities Data did not participate in publishing this supplement, and The Bond Buyer is solely responsible for its contents.
The Bond Buyer will correct any errors promptly if it determines that they resulted because The Bond Buyer erred in compiling the figures. If the errors resulted from Securities Data mistakes in coding the information in its data base, The Bond Buyer will advise Securities Data of the errors but it cannot guarantee that they will be corrected.