All U.S. financial markets struggled in the third quarter of 2008 with a slowing economy, nearly frozen credit markets and declining home prices; the municipal bond market was no exception. Long-term municipal bond issuance in the third quarter fell 37.9 percent compared to the previous quarter. Rating downgrades of monoline bond insurers were a further negative factor in the market for municipal bonds.

Liquidity in the municipal market declined throughout the third quarter of 2008, due in large part to consolidation of several major municipal bond broker dealers. As result the SIFMA Municipal Swap Index yield jumped to 7.96 percent on September 24 compared to 1.63 percent on September 3.

The yield ratio of AAA-rated 10-year municipals to that of comparable Treasury securities often exceeded 100 percent during the third quarter of 2008. As of December 8, the triple-A rated municipal yield was 4.22 percent while a comparable treasury yielded 2.77 percent, a difference of 145 basis points. Yields ended at 4.16 percent in the third quarter of 2008, an increase from the 4.01 percent at the end of June and 3.79 percent at month-end March 2008.

With institutional demand dwindling, municipal bond issuance declined as the third quarter progressed. In the first three quarters of 2008, long-term municipal bond issuance reached $321.5 billion, 0.9 percent lower than the same year-earlier period. Long-term issuance peaked in the second quarter at $145.8 billion, and slowed considerably in the third quarter amid the broader credit market turmoil, with issuance falling to $90.5 billion. Third quarter issuance was 37.9 percent lower than the prior quarter and 3.1 percent less than the $93.4 billion issued in the third quarter of 2007. Municipal issuance in September was $20.7 billion, a 36.3 percent decline from the prior month.

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, Assistant General Counsel, Co-Head: Leslie Norwood