Municipal bond issuance in 2010 is expected to exceed 2009 levels, according to Loop Capital Markets, which recently released its Municipal Bond Volume Forecast for 2010.
Based on an analysis of Treasury and municipal interest rates, yield curves and ratios, economic growth, historical volume levels, and bond elections, Loop Capital Markets projects approximately $435 billion of new municipal bond issuance in 2010.
“Interest rates are an important predictor of municipal bond volumes,” according to the report, which was authored by Chris Mier, Strategist and Ivan Gulich, Analyst. “Approximately 62 percent of the change in municipal volume on a period-over-period basis can be statistically attributed to changes in interest rates.” Municipal bond volume tends to rise when interest rates decline.
Economic trends also influence municipal bond issuance. The Loop analysis used total state and local government tax revenues – deemed a somewhat more stable proxy than other indicators – to measure economic growth. The study found a positive correlation between total tax receipts and the volume of new municipal bond issuance.
The slope of the yield curve and the 5-year MMD-to-Treasury ratio (reflecting the efficiency of fund the escrow in advance refunding situations) are two other important factors used in projecting municipal bond volume.
“Build America Bonds (BABs) may comprise about 30 percent – or $130 billion – of new volume,” according to the Loop Capital report.