MSRB report finds shrinking market for muni variable-rate securities

By Susanna Moon

Chicago, July 21 - The Municipal Securities Rulemaking Board said the municipal variable-rate market has continued to shrink in the first quarter of this year, with auction-rate securities falling to $320 billion and variable-rate demand obligations down at $55 billion.

The VRDO market may be under pressure in the near term as a significant number of bank credit facilities become due for municipal issuers, according to the findings in the MSRB's second annual report on municipal variable-rate securities, which summarizes key information for municipal auction-rate and variable-rate securities from early 2009 through April 2011.

The municipal variable-rate market began to contract in 2008, with the size of the variable-rate securities market falling from $339 billion in April 2010 and the auction-rate securities down 15% from the same period.

In fact, the variable-rate securities accounted for only 9% of municipal issuance in 2010, despite a record for overall issuance of $433 billion that year, the report noted.

The 2010 issuance marks the low point for variable-rate securities since 1983.

More than 40% of VRDO liquidity facilities are set to expire by the end of 2012. The number of auction-rate security trades fell 59.3%, and the number of VRDO trades fell 8.2%.

According to the report, interest rates for municipal auction-rate securities that were set at auction averaged 1.93% in 2009, compared with the average of 0.91% since 2010. During the same periods, auction-rate security interest rates set at the maximum rate remained relatively stable, averaging 0.97% in 2009 and 0.88% through April 2011, the report noted.

More than 68,000 auction-rate security rate resets have been reported. About 83% of the rate resets were set at the maximum rate.

The report is available online at msrb.org.

The MSRB said it also publishes an annual fact book and quarterly municipal securities statistics, and these are available online at msrb.org.

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