SIFMA released its 2011 Municipal bond Issuance Survey on Wednesday. Some of the findings are a bit murkier than usual because of uncertainty at the time the survey was conducted, from Nov. 16 to Dec. 1, over whether the taxable municipal Build America Bonds (BAB) program would be extended.
To Extend or Not To Extend?
The taxable BAB program was not extended in the Senate’s tax compromise bill, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, according to The Bond Buyer. That means that the forecasts for rates and muni issuance may change somewhat from the three forecasts in the SIFMA report. Indeed, “One panelist noted that the failure to extend certain programs (BABs, the AMT holiday and bank-qualified minimums) would drive yields on tax-exempts upward,” the report stated.
SIFMA noted that: “Three-quarters of the panelists assumed the Build America Bonds (BABs) program will be extended past 2010, although at a lower subsidy rate (32 percent),” although the subsidy range was 25% to 34%, the report states. Participants also assumed, SIFMA states, that the “bank-qualified limit” for localities to issue “qualified” bonds—those that can convey favorable tax treatment for banks—“will be set to $30 million permanently and the alternative-minimum tax (AMT) holiday will be continued.”
The AMT holiday is part of the “American Recovery and Reinvestment Act” and allows “private activity” municipal bonds to be exempt from the AMT, according to The Bond Buyer, which says that the exemption from the AMT expires at year end.
The SIFMA report included an alternate forecast, without the BAB program, and for this article that is what we refer to.
The rates forecast in the SIFMA report indicated that, “The federal funds target rate was expected to remain in the 0 - 0.25 range throughout 2011, before rising to 0.38 percent by December 2011.” Regarding the yield on the two-year Treasury note, participants projected that the yield was expected “to rise gradually from 0.5 percent in December 2010 to 1.05 percent in December 2011,” the report states. The yield for the 10-year Treasury note “was also expected to rise throughout 2011, “from 2.75 end-December 2010 to 3.55 percent,” according to survey participants.
But yields have jumped faster than predicted in some parts of the yield curve. On Thursday, the yield on the U.S. Treasury 2-year was 0.67%, according to Bloomberg.com. The 10-year Treasury bond yield was 3.50% as reported on AdvisorOne.com. The yield for the 5-year AAA muni was 1.60%, and the 10-year AAA muni was 3.32%, not far under the 10-year AAA corporate bond yield of 3.83%, the Yahoo Finance website said. It has been widely reported that added supply in the muni market, including a rush to issue BABs before the year ends, has boosted muni yields. The effect may be temporary because of that oversupply. The 10-year Treasury has ticked up nearly one percentage point in the past month, perhaps surprising some forecasters in the SIFMA survey.
New Bond Issuance
Without the BABs, total tax-free muni issuance for 2011 is projected to be $32.5 billion, up 54% from 2010. Twenty percent of that total is projected to be bond refundings. Long-term bonds, (longer than one year to maturity) account for $325 billion of the projected issuance, and short-term notes (under one year) are projected to be $57.5 billion. Of the long-term bonds, $50 billion are expected to be variable rate demand obligations (VRDOs), according to the SIFMA report.
Issuance of taxable municipal bonds (without a tax credit) is expected to jump 101% to $50 billion, and bonds subject to the AMT should add another $20 billion, according to the SIFMA forecast.
The total amount of tax-free plus taxable municipal bond issuance is forecast to be $502 billion; of that, the participants project that $395 billion of that total will be long-term bonds.