Municipal bond volume reached an all-time high in 2016, driven by refundings in the middle of the year, as issuers looked to take advantage of low borrowing costs.
The year's issuance of $444.79 billion eclipsed the old record of $433 billion set in 2010, according to Thomson Reuters data. The record was reached with 13,274 transactions, fewer than in 2010, when there were 13,828 deals.
"It was really all about refundings – we had such a low rate environment and refundings were through the roof," said Tom Kozlik, a managing director and municipal strategist at PNC Capital Markets. "Most people thought we would see multiple rate hikes and that didn't happen, so issuers kept taking advantage of the low rates."
Even after a slowdown following the Nov. 8 election and an interest rate increase by Federal Reserve policy makers in December, volume for the fourth quarter stands at $103.99 billion. The slowest quarter of the year was the first quarter, at $99.88 billion. The middle of the year was the busiest, as the third quarter accounted for $115.28 billion and the second quarter saw $125.65 billion of muni sales.
"I like to look and see how much comes by quarter and how that compares historically," said Sean Carney, director and municipal strategist at BlackRock. "Q4 issuance is usually 6% greater than Q3, but this year it was down 17%. And we saw more of a decrease this month than we do historically, as usually volume is only down 3% in December. The month-over-month decline is kind of telling."
It was a memorable year in financial markets, as investors reacted to Britain's vote to leave the European Union, record lows on the Municipal Market Data's triple-A benchmark scale, and the surprise election of Donald Trump as president, which sent muni yields skyward on concern over tax policy and the potential for inflation.
"The large drivers were ballot boxes, with Brexit and the presidential election – both were deemed surprising outcomes, and those things fueled greater muni issuance," Carney said. "All of the issuance we saw in August through September was a pull-forward, as everyone was trying to get in before both the Federal Reserve's interest rate hike and the election. It was a perfect storm."
The old record only stood for six years, but Kozlik said it may be a while before we see another one.
"In order for records to be set, you need overall economic growth to help drive issuance and incentives," Kozlik said. "When the old record was set, Build America Bonds were the incentive. It's so difficult to predict about when the next record will be, but I don't see anything like that happening in the near future, so I think this record will be safe for a while."
December volume finished at $18.88 billion in 694 deals, which is 24.5% lower than in December of 2015, when there was $25.01 billion of issuance in 1,011 deals, according to Thomson Reuters data.
Refundings, which have been strong for most of the year due to persistent low interest rates, dropped 39.4% to $4.77 billion in 195 transactions, from $7.86 billion in 396 transactions during the same period last year.
With interest rates on the rise, as most analysts predict three rate hikes in 2017, refunding volume should tail off. The pool of refunding candidates has shrunk and issuers have refunded almost everything they can.
New money sales in December decreased 6.5 % to $12.17 billion in 459 deals from $13.01 billion in 548 deals, while combined new-money and refunding issuance dropped 53.3% to $1.95 billion from $4.14 billion.
"New money made up a larger portion, as we got later in the year and I would expect that to continue in 2017," said Carney.
Kozlik agreed, saying that faster economic growth and rising revenues as municipalities increase taxes and fees could help spike up new money issuance.
"The 2016 bond elections gave me indications that not only are people requesting for infrastructure improvements, they are now more willing to pay for it, as most of the ballots were approved," Kozlik said.
Negotiated deals, at $14.42 billion, were lower by 1%, while competitive sales decreased by 31.1% to $3.91 billion from $5.68 billion in December.
Issuance of revenue bonds decreased 38.3% to $10.66 billion, while general obligation bond sales increased 6.3% to $8.22 billion.
Taxable bond volume was 7.6% higher at $2.02 billion, while tax-exempt issuance declined by 27.4% to $16.39 billion.
Minimum tax bond issuance slipped to $474 million from $558 million, while private placements sank to $550 million from $4.77 billion. Zero coupon bonds decreased to $6 million from $227 million.
Bond insurance dropped 2.8% for the month, as the volume of deals wrapped with insurance dipped to $1.72 billion in 123 deals from $1.77 billion in 136 deals a year earlier.
Nine out of the 10 sectors saw year-over-year declines, with the general purpose sector the only one with a year-over-year improvement, to $5.95 billion from $4.38 billion.
Issuance in other sectors fell at least a 17.8%, with electric power posting the biggest drop – 82.2% -- to $206 million from $1.16 billion. For the sectors other than general purpose, the median change from the previous period was a 44.4% decline.
As for the different types of entities that issue bonds, four were up from December 2015: state governments, cities and towns, districts and direct issuers. State governments more than doubled issuance to $1.65 billion from $700 million, cities and towns improved 5.2% to $3.28 billion from $3.12 billion, districts to $5.34 billion from $5.33 billion, and direct issuers to $60 million from $35 million.
As for the rest, state agencies, counties and parishes, local authorities and colleges and universities declined by at least 9% and districts' issuance was unchanged at $5.33 billion.
California is the top issuer among states for the year as Issuance from the Golden State this year totaled $63.71 billion.
The Lone Star State comes in next at $51.96 billion. The Empire State follows with $43.57 billion. The Keystone State is in fourth with $20.37 billion and The Prairie State rounds out the top five with $19.89 billion.
Looking ahead at 2017, Carney expects to see issuance levels closer to where they were in 2015.
"Ultimately, we will see less issuance in 2017 than we did in 2016, but what does that mean? It means we have a healthy market that is functioning properly," he said. "The question I have for 2017, is if we get a decent amount of issuance in January and February – is it going be more of a pull forward or more of a sign of things to come for the year?"
Analysts will be keeping an eye on the tax reform situation with the new administration coming in.
"Ever since the election, equities have gone up in price and bond yields have gone up in yields and down in price," Carney said. "Is the market reaction validated or challenged? If challenged, we might see a reversal. The first 100 days are going to be important for many reasons; we will find out rather quickly and then go from there."
Kozlik said his forecast for 2017 sits at $365 billion, split between $220 billion of new money and $145 billion of refunding.
"Of course tax reform will continue to be watched closely, as it has the potential to impact supply and how buyers look at the relative value of munis. But I also think it will be a big year for the intersection of municipal credit and pension liabilities," he said. "A lot of problem areas are in the process of fixing those issues, but it is a really difficult thing to do and is a multi-year process, but we will see more of that in 2017."
