Total long-term municipal bond issuance did what no one thought it would do in 2014: beat 2013's total.
Thanks to a huge second half, particularly the fourth quarter, muni volume ended 2014 up 0.7% from 2013, having risen to $336.51 billion in 10,984 deals from $334.08 billion in 11,486 deals the year before.
After seeing year-over-year declines in the first and second quarters of 23.5% and 4.8% respectively, things started to turn the corner in the third quarter with an increase of 3.5%.
The fourth quarter was the saving grace, as volume increased by 30.1% to $10.48 billion in 2014 from $8.06 billion in the same period the previous year.
"What drove issuance was in the second half of the year, especially in the fourth quarter, was performance picked up from a weak 2013, the spreads contracted and interest rates declined, which made it attractive for issuers to come to market," said Dan Heckman, senior fixed-income strategist at U.S. Bank.
"Rates fell even further in fourth quarter and that accelerated issuance in November and December, which is when we saw a big pickup in supply," he said. "The level of rates was attractive and people elected wisely to come to market."
"I also feel as though renewed confidence by underwriters helped, as week after week we had positive inflows. When you have a good demand backdrop, get deals done," according to Heckman
The biggest monthly gains in 2014 belonged to June, October and December.
June featured 1,221 issues totaling $35.77 billion in 2014, up from 1,045 issues totaling $26.11 billion in 2013, an increase of 37%.
October saw an increase of 27.8%, rising to $36.97 billion in 1,024 deals from $28.94 billion in 875 deals from the same period the year before.
December jumped up 42% to $38.38 billion in 1,042 deals from $27.04 billion in 837 deals.
New-money issuance decreased 10.8% to $144.02 billion in 2014 from $161.50 billion in 2013, while refunding increased 13.6% to $126.72 billion from $111.53 billion.
Tom Kozlik, municipal credit analyst at Janney Capital Markets, said refundings drove 2014 primary market issuance higher than expected because "interest rates were relatively low and issuers took advantage."
"New-money issuance will remain challenged; we do not think new-money issuance will rise substantially until revenues rise," Kozlik explained. "Most of the revenue streams that drive public finance sectors are still not back to their peaks."
Kozlik said there are several reasons why new-money issuance has not continued to trend upwards as it did from 2002 through 2010.
"There is lower revenue growth across all sectors," Kozlik said, "more austerity, minimal political and voter support for higher revenues, and alternative debt products such as direct bank loans."
Tax-exempt deals saw a slight bump of 5.3% to $300.62 billion in 9,945 offerings in 2014 compared to $285.48 billion in 10,146 deals in 2013, while taxable sales declined 30.7% to $26.54 billion in 920 deals from $38.29 billion in 1,216 deals in 2013.
Negotiated deals totaled $243.02 billion in 6,344 deals in 2014, up a hair by 0.2% from $242.48 billion in 6,744 deals in 2013. Competitive deals rose 3.6% to $71.88 billion in 3,818 deals from $69.39 billion in 3,819 deals in 2013.
So if interest rates were so low, why did more issuers not take advantage of this and sell debt for delayed or new projects?
"Despite the rhetoric about a broader U.S. economic recovery, state and local governments are still generally following austerity measures because they are having trouble balancing their budgets. This is because expenditure demand is far outpacing revenues," said Kozlik.
Because state and local governments sell the majority of municipal debt, Kozlik believes we are seeing cracks in the U.S. state sector as well as an unprecedented multiyear run of credit deterioration by some local governments.
State governments, state agencies, counties and parishes, colleges and universities, and cooperative utilities also saw year-over-year decreases, while cities and towns, districts, local authorities, direct issuer and tribal governments all saw increases.
Both Heckman and Kozlik agree that 2015 issuance will be directly correlated with if and when the Federal Reserve raises rates and by how much.
"The Fed is going to raise rates this year and increase in June or as early as May, especially if the economy and jobs continue to strengthen," according to Heckman.
"I think that we will see more of a continuation of what we have seen in the last year, which is flattening of the yield curve," he said. "I also think a lot is dependent on the confidence by municipalities and strength of the economy as unemployment continues to drop. I don't think there will be much of an increase in 2015."
Kozlik thinks that if rates stay low, overall primary market issuance could and most likely would beat 2014's issuance.
"This will again be driven by the low interest rate environment and refundings," he added. "We are forecasting total issuance of between $325 billion and $375 billion."
