The U.S. financial markets continued to struggle in the fourth quarter with a slowing economy, nearly frozen credit markets and declining home prices. Investors continued favoring Treasuries, which negatively impacted the municipal bond market. The yield ratio of AAA-rated 10-year municipals to that of comparable ten year Treasury securities reached a high of 196 percent on December 18, and ended the fourth quarter of 2008 at 174 percent. The ratio fell to 94 percent early in 2008 compared to 85 percent, the precrisis average range in 2007. AAA-rated municipal bond yields ended 4Q’08 at 3.91 percent, down from 4.16 percent at the end of September and 3.74 percent at year-end 2007.

Long-term municipal bond issuance in the fourth quarter fell 22.0 percent compared to the previous third quarter and 33.2 percent compared to fourth quarter 2007.1 Rating downgrades of monoline bond insurers were a further negative factor, with Berkshire Hathaway the only remaining AAA-rated insurer at year-end.

The SIFMA Municipal Swap Index yield declined to 0.90 percent at end-December compared to the high of 7.96 percent on September 24, and a current 52 week average of 1.95 percent.

Long-term municipal issuance was $70.0 billion in the fourth quarter of 2008, down from $89.8 billion issued in the third quarter and $104.8 billion issued in the same year-earlier period. For full-year 2008, long-term issuance totaled $391.2 billion, below the $429.3 billion issued in 2007, but slightly above the $386.5 billion recorded in 2006.

Issuers decreased the use of bond insurance and other forms of credit enhancement in 2008. Only 18.5 percent of all new issues carried bond insurance in 2008, compared to 46.7 percent and 55.6 percent in 2007 and 2006, respectively. Letters of credit from domestic banks, however, increased over the previous year, from 4.2 percent to 13.6 percent. Issuance of variable rate demand obligations accounted for 29.7 percent of total municipal issuance in 2008, up from 11.5 percent in 2007, while fixed-rate issuance declined from 74.5 percent to 67.5 percent. Unenhanced new issues on a dollar volume basis rated Aaa by Moody’s Investors Services declined to 14.0 percent from 20.3 percent in 2007, and those rated AAA by Standard & Poor’s went from 24.3 percent to 21.6 percent.

About the Report

The municipal bond credit report is a quarterly report on the trends and statistics of U.S. municipal bond market, both taxable and tax-exempt. Issuance volumes, outstanding, credit spreads, rating changes, highlights and commentary are included.

Credits

SIFMA Research

• Managing Director, Director of Research: Kyle Brandon
• Research Analyst: Paul Rainy

Municipal Division

• Managing Director, Associate General Counsel, Co-Head: Leslie Norwood