Political Resistance to Spend Weighs on Muni Market
By Rom Badilla, CFA
August 9, 2012
Despite the high amount of refunding issuance influenced by the low yield environment, municipal bond supply emanating from new projects has remained low from a historical perspective. On a year over year basis, July issuance in this space was very close to unchanged from 2011 according to Citigroup’s report, Municipal Market Comment, spearheaded by analyst, George Friedlander.
Citigroup projects that new project supply for 2012 should hit about $150 billion which is significantly down from the $250 billion the market has come to expect in the past decade
The research team account for the drop in supply to resistance in starting new projects stemming from limited debt capacity in a budget-constrained environment and less need of projects in a slow growth economy. Most importantly though, political resistance to spending is having a effect on new project supply:
“In many states, especially those with strong “Tea Party” support, it has become increasingly difficult to get new projects approved where approval is necessary, and increasingly close to a political third rail to start new projects that aren’t very severely needed. So, new money financings are likely to stay below historical trend levels for quite some time to come. This is the case in spite of the need to spend to replenish all types of infrastructure and related state and local projects.”
The report shows that as a result, supply from new projects has fallen significantly below trend which is evident when compared with construction costs. Citigroup concludes that given the factors and the current political sentiment, issuance will continue to be sub-par for the foreseeable future.
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