August Volume Hits 30 Year High

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Long-term municipal bond volume sky-rocketed to the highest August total in at least 30 years, as deals to raise new money surged along with refundings.

Monthly Volume

Volume rose 20.5% to $39.11 billion in 1,070 issues, from $32.45 billion in 968 issues in August of 2015.

After the muni market produced more than $40 billion in volume in both May and June, issuance had dipped to $26.07 billion in July. August was a lot busier than anyone anticipated, surpassing totals for the month in data going back to 1986. The last time there was close to the same amount of August volume, was back in 2009, when $36.36 billion came to market, according to data from Thomson Reuters.

New money deals surged 27.9% to $15.89 billion in 534 deals from $12.42 billion in 526 deals a year earlier, raising expectations that demand for infrastructure improvement will propel muni sales in the months ahead.

"New money borrowing should continue its growth pace, as delayed maintenance and capital projects become more urgent," said Alan Schankel, managing director, municipal bond strategist at Janney.

Chris Mauro, director of municipal bond research at RBC Capital Markets said that new money year-to-date is running about 5% ahead of last year and "should continue at this pace for the rest of the year."

Refundings, which have been strong for most of the year due to persistent low interest rates, rebounded from a dip in July. They were up 38.9% to $17.46 billion in 452 transactions from $12.57 billion in 368 transactions during the same period last year.

"We may see a slowing in the refunding pace," Schankel said. "Looking back 10 years, when many current refunding candidates with 10-year calls were issued, I note that rates were generally rising in the first part of 2006, but fell sharply and steadily from July to December implying that there may be fewer candidates for refunding as this year progresses."

Mauro had a different take.

"Unlike last year, when refundings faded, refunding volume should continue to be strong through the balance of this year because of continued low rates," Mauro said.

Combined new-money and refunding issuance dropped by 22.7% to $5.76 billion from $7.45 billion.

Negotiated deals were higher by 12.2% to $27.95 billion, while competitive sales increased by 93.5% to $10.91 billion from $5.64 billion.

"With the high volume in competitive sales, state issuers such as Pennsylvania and Massachusetts drove the competitive calendar," said Schankel. "I suspect Pennsylvania may have sold its issue in second quarter if they had not faced budget issues. Fortunately, and unlike last year, state leadership was able to deliver a balanced budget, only slightly late."

Issuance of revenue bonds increased 0.5% to $21.52 billion, while general obligation bond sales gained 59.3% to $17.59 billion.

Taxable bond volume was 8.4% lower at $3.62 billion, while tax-exempt issuance increased by 27.3% to $35.09 billion.

Minimum tax bonds issuance slipped to $396 million from $922 million.

Private placements sank to $243 million from $1.88 billion.

Zero coupon bonds decreased to $87 million from $121 million.

Bond insurance increased 1.7% for the month, as the volume of deals wrapped with insurance rose to $2.21 billion in 146 deals from $2.17 billion in 151 deals.

Variable-rate short put bonds inclined 23.4% to $796 million from $645 million. Variable-rate long or no put bonds fell to $29 million from $234 million.

Bank qualified bonds improved 17.2% to $1.86 billion from $1.59 billion.

Six out of the 10 sectors saw year-over-year gains. Education related deals rose 38.2% to $12.75 billion from $9.23 billion, health care improved 15.8% to $2.95 billion from $2.55 billion, utilities increased 16.7% to $4.49 billion from $3.85 billion and general purpose saw a 30.4% increase to $10.16 billion from $7.79 billion. Electric power and development were the other two sectors that saw improvements.

"Healthcare and higher-education have certainly benefitted from narrow credit spreads and seemingly insatiable investor appetite for yield," Schankel said.

Environmental facilities, housing, public facilities and transportation all saw declines from the same period last year.

As for the different types of entities that issue bonds, all but three saw yearly increases. Countries and parishes improved to $2.52 billion from $1.11 billion, cities and towns issuance increased to $7.09 billion from $4.67 billion, districts more than doubled bond sales to $10.23 billion from $4.85 and colleges and universities posted a huge jump to $2.14 billion from $270 million.

State agencies, local authorities and direct issuers saw declines of 29.2%, 29.5% and 27.2%, respectively.

"State economies and underlying tax revenue generation is still too tenuous to support a sustained ramp-up in capital spending, so August's numbers are probably not an indicator of increased capital spending," said Mauro.

California is still the top issuer among states for the year to date, followed by Texas, New York, Pennsylvania and Florida.

The Golden State so far this year has issued $39.40 billion, with the Lone Star State right at its heels with $38.58 billion. The Empire State follows with $29.57 billion. The Keystone State is in fourth with $13.55 billion and The Sunshine State rounds out the top five with $13.51 billion.

Schankel also said that although it's difficult to say with a high degree of confidence, he generally believes strong volume will continue into September.

"The budgeting process is behind (at the state level) and infrastructure investment continues to be a nagging issue," he said. "With recent talk, stimulated by Jackson Hole comments about one or two rate hikes this year, CFOs and finance directors may be looking to lock in today's low rates ahead of potential increases. There is also the element of uncertainty ahead of elections."

Mauro is more skeptical.

"On average, September is lighter than August," Mauro said. "Historically, the only time September has been heavier than August was when August was particularly light. That's not the case this year."

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