New issue long-term municipal bond volume continued to take a pounding, dropping to $89.18 billion in the first half of 1994, down 40% from $149.13 billion a year ago, according to information from Securities Data Co.'s data base.
When the second quarter of 1994 began, the municipal bond market was already suffering from the effects of the Federal Reserve Board's incremental increases in the federal funds rate. The troubles were exacerbated by uncertainty over inflation and the beating that the U.S. dollar took in overseas markets. The quarter ended badly, amid reports of a growing economy that resurrected the specter of inflation.
All those factors combined to prompt brisk selling by mutual funds and scared issuers and other investors away from the market. The Bond Buyer's 30-day visible supply averaged only $4.78 billion in the first half, down 26% from $6.43 billion in the same period last year.
This year's decline from last year's sales level has been intensifying every month. June's volume showed the steepest drop yet, a 56% decrease to $13.55 billion from $30.98 billion in June of 1993.
To make matters worse, even this reduced new-issue supply still exceeds demand, judging from the continuing bloat in dealer inventories. One key measure of inventory, Standard & Poor's Blue List, posted a daily average of $1.76 billion in the first half of 1994, up $300 million, or 20%, from $1.46 billion for the same period last year.
"Unless interest rates begin moving down, we'll be off more than 40% by the end of the year," said George Friedlander, managing director of portfolio strategy (fixed-income) for Smith Barney Inc.
As the year goes on, Friedlander said, "volume has been getting worse," mirroring the rise in bond yields. New-issue volume dropped to $38.82 billion in the second quarter, down 53% from $81.81 billion in the year-ago period. In the first quarter, bond sales were off 25%, to $50.37 billion from $67.32 billion the previous year.
The Bond Buyer's 20-bond index of general obligation bond yields averaged 6.17% in the second quarter of 1994, up from 5.57% in the first quarter and 5.91% in the second quarter of last year.
"But nothing's surprising," Friedlander said. "Most of the big refundings have already been done. Interest rates have killed the rest. But new money is moving ahead nicely."
In the first six months of this year refunding volume plunged 66%, to $26.73 billion, or 30% of the market, from $78.01 billion and a 52% share a year ago. New-money issuance, however, climbed 18%, to $54.92 billion, or 62% of the first-half 1994 volume, from $46.5 billion and 31% last year.
Although new-money deals were down 10% in June, to $9.64 billion from $10.68 billion in June of last year, Friedlander noted that June 1993 "was a phenomenal month." The $30.98 billion of bonds sold in June of last year was the third-highest monthly figure on record.
"We have an unmistakable trend line that is extremely negative," said Robert Chamberlin, senior vice president of municipal research and marketing at Dean Witter Reynolds Inc. "The numbers are disappointing, but not unexpected.
"It's how the downturn is across the board that shows this cutback is real ... and the market is absorbing these numbers. There's a general sense of malaise in the market, and it's going nowhere."
The only specific financing purpose that showed an increase over a year ago was housing, which increased 11% in the first half to $6.99 billion from $6.29 billion a year ago. The year-over-year gain, however, was due mainly to the June 1992 expiration of the tax exemption for mortgage revenue bonds. The loss of the tax exemption depressed housing bonds sales until September 1993, when the the tax exemption was reextended permanently.
The increase in housing bonds fueled a 35% first-half surge in bonds subject to the alternative minimum tax, to $6.9 billion from $5.12 billion, and a 46% jump in bonds secured by insured mortgages or collateralized by mortgage securities bonds, to $1.58 billion from $1.08 billion.
In the largest specific purpose -- education --, volume declined 27% in the January-June period, to $17.67 billion from $24.32 billion a year ago. Bonds used to finance electric power projects suffered the steepest decline, plummeting 78% to $3.66 billion from $16.81 billion, reflecting the sharp drop in refundings.
The use of bond insurance to enhance municipals plunged 42% in the first half, to $33.64 billion, but insured issues maintained their 38% share of the overall volume.
"These numbers reflects the truism that the market feeds on volume," Chamberlin said. "The market does not do well when the volume isn't there. However, you would expect that with figures like these it would be inconceivable we'd also have a growing Blue List. It all shows a lack of interest furnished by the new-issue market."
Securities Data's bond volume figures are preliminary and subject to substantial revision. For instance, May's volume has been revised higher by nearly $2 billion, to $13.69 billion from $11.76 billion on June 2, when it was previously published in The Bond Buyer.
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