SIFMA 2010 MUNICIPAL ISSUANCE SURVEY

Conducted in November 9^th through the 30^th some of the heavy hitters in the fixed income industry were poled to forecast the outlook for municipal bonds. The group took a look at both taxable and tax free bonds, and the outlook for the coming year, 2010. Among the surveyed were, Barclays Capital, Citi Group, Goldman Sachs & Co, and a half dozen others who will be heavily involved in underwriting next year’s bonds.

Respondents to the survey forecast an increase of municipal issuance to the tune of 14%. Due to the new tax credit taxable bonds, the taxable munis are expected to increase a whopping 45%, due largely to the new tax credit Build America Bonds.

The respondents are fully aware of the risks involved in next year’s municipal bond issuance. Some of which are inflationary concerns coupled with an increase in federal deficit, the economy, and the extension of Build America Bond program.

The SIFMA Municipal Issuance Survey (Survey) projects tax exempt municipal issuance to increase about 7%, or $450.5 billion in 2010. Long term tax exempt municipal issuance is expected to make up $347.5 billion of that figure, with short term issues coming in around $68 billion. Variable Rate Demand Obligation issuance is expected to increase 16.7 percent over last year, or a total of $35 billion this year.

On the taxable side of things, the direct pay BAB issuance will increase 46.6%, or a total of $85 billion. Other taxable municipal bond issuance, excluding any tax credit bonds, will increase to $20 billion, or an increase of 17.6%

The issuance of tax credit municipal bonds is expected to come in at $5 billion, that’s five times what they were in 2009. Last year there were very few tax credit BAB’s but this year, respondents expect the tax credit BAB’s to be the largest issuance of any tax credit bonds, followed by qualified school construction bonds and renewable energy bonds.

A great majority of the Survey respondents agreed that the largest issuing use-of-proceeds sector would be general purpose bonds, although some feel that transportation or education bonds to be the largest. When asked about risk, over half the surveyed cited the extension of the BAB program to be of concern, along with the absence of significant federal stimulus programs, and the absence of other federal legislation affecting municipal issuance or the value of tax -exempt bonds.

The Survey respondents were also in agreement with their views on interest rates in the coming year. They expect a gradual rise early in 2010 due to inflationary pressures and an improving economy. The increases initially coming in with increases in the 2-year and 10-year Treasury yields and the federal funds target rate.

Respondents expect the 2-year Treasury to reach 1.05 in March, 1.8% early June, and 2.0% by the end of the year. The 10-year is expected to hit 3.75 in the first quarter of 2010, and 4.38% by the end of the year 2010. The federal funds rate is expected to hit 1.0 by the end of the year.

The spread between AAA GO bonds and the 10-year treasury is expected to return to pre credit crisis levels as investors continue to settle down. While over half of those surveyed share some concern about inflation, they agree that it will remain in check as long as capacity utilization remains low. This will give plenty of room for expansion without inflation running away from us.