Despite a slow start to begin 2016, an active second quarter has vaulted long-term municipal bond issuance onto a pace to reach the $400 billion volume plateau for the second straight year.
Long-term muni volume finished the first half at $223.75 billion in 6,873 transactions, only slightly down from the $226.74 billion in 7,407 transactions seen in the robust first half of 2015, according to data from Thomson Reuters.
"It's hard to just say start on January 1st and cut if off on July 1st because you are on a continuum of a trend," said Peter Block, managing director, credit strategy for Ramirez & Co. "The first half of the year mirrors the trend we have been seeing the past few years and since the financial crisis, where issuers are having trouble taking on new debt."
Block said that there are a few exceptions to the rule and a few issuers who are firing on all cylinders but that overall, there is a slower revenue growth which mirrors that overall economy.
"If you take the volatile stock market, pension cost pressures and continued growth in fixed costs, plus you add the need for infrastructure and the development of infrastructure — or lack thereof as there is tension between those two things — and then also throw in political factors with the upcoming election cycle, all of those things combined to produce a lower volume given what you would expect given the interest rates," he said.
The market saw $99.45 billion of that total volume in the first quarter and $124.30 billion in the second quarter of 2016, which compares to $108.49 billion and $118.25 billion in the first two quarters of 2015.
"One of the big takeaways is new money in the second quarter came in pretty strong," said Natalie Cohen, managing director of municipal securities research at Wells Fargo Securities. "You can see that in the difference in the quarter for volume, as we really saw changes in rates and a few larger deals that were offered."
For the most part, municipal issuance steadily increased as the year went on, with one hiccup. The year begin with $25.48 billion in January, went up to $31.59 billion in February, and increased even more to $42.38 billion in March. From there, it dropped to $35.17 billion in April, moved back up to $41.83 billion in May, and continued to rise in June with $47.30 billion.
"Towards the end of the second quarter, we had the Brexit and after that, issuers finally got to put their bonds on the table and start to sell them," she said.
With interest rates as low as they have been, issuers have been taking advantage of the opportunity and are refinancing as much old debt as possible, still not at the pace of refundings last year but it is still a potent part of the issuance. Refundings have accounted for $92.51 billion so far in 2016 and that compares with the $101.81 billion of refundings we saw in the first half of 2015.
New money deals have increased year-over-year to $87.09 billion from $76.64 billion in the first half.
"I think part of that is that state and local governments are saying we can't sit around and wait for federal government, we have projects that we need to get done," Cohen said. "Conditions are very good; refundings have helped balance sheets across the country, but we are happily moving in the direction of new money."
Minimum tax deals were up to $8.05 billion from $5.41 billion, which is a direct correlation to the increased interested that foreign investors and crossover buyers have shown in U.S. municipals bonds.
"Rates are so low in a bunch of countries across the world and those crossover and foreign buyers who are interested in long term yields, they are looking for yield," said Cohen. "AMT deals are of interest to those who don't care about U.S. tax codes. They can pick up extra yield and it ends up being better than what they can buy in their home country or any other place."
Block said that you can't underestimate the political effect and that there are a lot of forces at work that are conspiring against something that looks like a once in a lifetime chance to issue debt while rates are so low.
"That, more than anything has impacted issuance. If there were no politics, you would have a lot of volume, particularly with new money deals going toward infrastructure," he said. "
Block noted that for the most part size of capital has not grown and more than that, issuers have not spent all of their bond revenues.
"Most municipalities would build projects on a faster timeline if they had the political will to take on new debt, but this has stalled everything out and partially why all the money hasn't been spent.
"In most cases, they couldn't agree on what projects to spend on, so they think 'why borrow more when we haven't spent the money we borrowed before?'"
