A combination of increased tax receipts among state and local governments and the availability of relatively low long-term yields in 2015 led to the lowest volume of short-term note issuance in the municipal market in six years, according to Thomson Reuters data.
Issuance of the one-year investment vehicles continued its gradual slide down, decreasing by 22.4% in all of 2015 to $34.75 billion among 2,432 issues, versus the $44.76 billion among 2,606 issues that was issued in all of 2014, the data showed.
Last year's volume was nearly half of the approximately $65 billion outstanding in 2010 when volume peaked, according to Phil Fischer, head of municipal bond research at Bank of America Merrill Lynch.
A decade earlier than that, the outstanding municipal note volume was approaching nearly $100 billion, Fischer pointed out.
Notes are typically used to finance local governments' short-term borrowing needs and repaid with the arrival of their tax receipts.
Volume started to deteriorate five years ago when it dropped to approximately $61 billion in 2011 and 2012, $53.4 billion in 2013, followed by $44.76 billion in 2014, experts said.
Now, after 16 consecutive quarters of positive tax receipts received by state and local governments, they said it's no surprise that the need for short-term municipal note issuance has been steadily declining for years.
"They are well capitalized given the economic benefits and tax revenues they received over the last several years, and that's decreased the overall need for state and local issuers to access the short term market," said Peter DeGroot, managing director and head of municipal research and strategy at JPMorgan Securities.
State governments indeed issued 68.4% less than they did in 2014, with $4.21 billion sold among 15 issues in 2015, compared to $13.33 billion among 17 issues the prior year.
"Tax receipts were up, and cash and fund balance reserves were fairly healthy at the state and local level," agreed Richard Ciccarone, president and chief executive officer at Merritt Research Services LLC.
Fischer said state tax receipts typically increase by about 2.7% when GDP grows by 1%.
"A reasonably growing and reasonable stable U.S. economy will tend over time to depress the note issuance in the municipal market and exacerbate the excess demand," Fischer said.
Local authorities also dipped by 25.8% in 2015, issuing $2.10 billion among 89 issues, versus $2.83 billion among 101 issues the previous year.
Some outside market factors contributed to the healthy state coffers last year.
"We had a little bit of a sell-off in the stock market, but as the stock market grows through the years, the general tendency is for state revenues to grow at an accelerated rate," Fischer said.
Meanwhile, the relatively low yields on the long-end of the municipal market are dissuading issuers from short-term borrowing, experts said.
"Issuers are incentivized to lock into longer-term rates given that yields are exceedingly low by historic standards," DeGroot said.
Ciccarone said issuers were probably more inclined to lock into lower long-term yields in 2015 given the growing speculation that the Federal Reserve Board would begin to raise rates.
As result, new-money note issuance saw a 22.3% decline, dropping to $34.19 billion among 2,396 issues compared with $43.98 billion among 2,570 issues in 2014. Refunding issuance slide even more as volume dropped to $464.5 million among just 29 issues in 2015 — a 40.4% decline from 2014's $779.3 million among 32 issues.
At the same time, last year's total short term issuance of $34.75 billion is indicative that the 2015 market, like those in the past, was impacted by a supply and demand phenomenon, experts added.
"Clearly the lack of supply has driven the relatively low yields that we have seen in the short end of the tax exempt market, and that will be sustained in the foreseeable future," DeGroot said.
"The demand significantly outstripped supply in the short-term market, which led to the large difference between the yields available in tax-exempt, short portion of the market relative to the taxable short-term market," he explained.
In terms of volume, tax-exempt note issuance fell 22.4% last year to $33.16 billion among 2292 issues down from $42.73 billion in 2442 issue the prior year. Taxable short-term note issuance dropped 29.9% to $1.34 billion in 133 issues, versus $1.92 billion among 161 deals in 2014.
Fischer agreed that there has been "excess" demand for short-term municipal notes for years — especially when comparing 2015's $34.5 billion to the large universe of tax-exempt money market funds.
"The point is that means there's a structural imbalance at the short-end of the municipal market and it's a long-term imbalance," Fischer said.
But, the declining short-term note volume is not all doom and gloom, according to the experts. In fact, Fischer said curtailing short-term debt bodes well for the municipalities from a credit perspective.
He said the decreased need for short-term note borrowing by state and local issuers indicates that underlying credits in the municipal market are much stronger.
"Clearly, one of the first indications of credit difficulties that analysts look for is the amount of short-term debt an issuer has," he explained. "Because the short-term debt has to be rolled over regularly, that creates a financing problem when there's a credit issue with the issuer."
"We know this because note issuance keeps coming down," Fischer explained. "The states did not in fact lever their way out of the recession, but notes outstanding a few years ago were on the order of twice what they are now."
"Their liquidity has improved and the credits have gotten stronger," Fischer added.
On the flipside, he said weaker credits borrowed less, which is why states like Illinois, are among the trailing issuers.
The fact that states, like New York, New Jersey, and California, led the pack in terms of short-term note issuance in 2015 is no surprise due to their size, according to Fischer.
New York topped the state issuance of short-term municipal notes last year, and was among those that increased their short-term note debt last year.
The Empire State issued $9.06 billion within 887 issues, which was actually up from the $7.97 billion it sold among 917 issues in 2014. However, he said states, like Texas, have sliced their note issuance considerably in the last year due its own financial austerity.
Texas issued $1.62 billion among 22 issues last year, down substantially from $6.6 billion in all of 2014, when it also sold 22 issues.
"Texas is not without some problems, but on the other hand, the world could do well to have their problems," Fischer said.
"It's a booming economy in spite of all the energy issues, and we see it coming out in the wash with regards to something like the note issuance," Fischer said.
Other sectors, like development, fell by 60.6% to $114.5 million among 11 issues from $290.8 million among 14 issues, while healthcare issuance dropped by 54.6% to $176.9 million among 11 issues over $389.7 million among the same amount of issues in 2014.
Two sectors that actually saw their issuance double last year is electric power and transportation — increasing to $746.2 million among 16 issues and $2.2 billion among 66 issues, respectively.
In 2014, electric power issued $341.3 million among 17 issues, while transportation issued 1.08 billion among 58 issues.
Overall, the low volume of short-term paper and the very low rollover risk in the municipal market is an indication of why the municipal market "doesn't have Greek-like characteristics," according to Fischer.
"Long-term projects are financed with long-term debt, not short-term debt that needs to be rolled over all the time," he added.
