Muni Volume Plunges as Market Waits for Trump

BB030117VOL.jpeg
BB030117VOL.jpeg

Municipal bond volume plunged 34.9% in February, more than some analysts expected, as refunding transactions dried up and the market waited for details on President Trump's infrastructure financing plans.

Monthly Volume

Total volume for the month dropped to $20.68 billion in 660 transactions from $31.75 billion in 1,026 transactions in February 2016, according to data from Thomson Reuters.

"February is frequently a slower supply month, but we were surprised that issuance pretty much fell off the cliff after a relatively robust January," said Mikhail Foux, director of research at Barclays Capital.

The drop put long term municipal bond issuance 3.6% behind last year's record setting pace through two months. Issuance year-to-date stands at $55.40 billion, down from $57.48 billion a year ago.

Vikram Rai, CFA and head of municipal strategy at Citi, said that he, too, was surprised at the steepness of the drop in February volume, though he wasn't surprised that it was down.

"In general, we expect gross supply in 2017 will be lower vs. 2016," said Rai. "We have no doubt that Mr. Trump's administration is sincere about wanting to increase infrastructure investment, but even if infrastructure-related bills do translate into traditional new money issuance, it will take some time for them to do so."

Rai said that as of now, Citi's gross issuance forecast is for $374 billion, with new money accounting for 62% of overall volume as refunding drops from 2016 levels.

"We expect net issuance to be positive $60 billion. It bears remembering that new initiatives similar to the [Build America Bond]s program can cannibalize traditional tax-exempt issuance, and the net effect on volume may not be material after all."

Refundings slid to $5.26 billion in 204 deals from $15.02 billion in 454 deals a year earlier. Refundings were a bigger part of the market last year as issuers rushed to market to take advantage of low interest rates, ahead of expected Federal Reserve rate increases.

"Steep curves typically discourage advance refundings, because they make for more pronounced negative arbitrage," said Rai. "If anything, an interest rate hike causes the curve to flatten and makes it more supportive of refundings. But, also keep in mind that issuers tend to avoid coming to market around Federal Reserve meetings, as they want to stay away from rate volatility."

Barclays is forecast 2017 issuance to be somewhere between $360 billion and 380 billion, mainly due to slower refundings compared with last year.

New money issuance decreased 4.7% to $11.98 billion in 410 deals to account for more than half of the month's issuance. That compares with $12.56 billion of new money volume in 511 deals in January 2016.

Foux said that January and February 2017 are mirror images of last year, as January was up 30% year over year and February is down 35%, putting the market roughly on track with 2016. He does, however, see one difference in the approaching month.

"Last year supply picked up dramatically in March, averaging $42 billion through June – it is unlikely to happen this year," he said. "We believe that supply will start lagging behind last year's pace in the coming months."

Combined new-money and refunding issuance in February dipped to $3.44 billion from $4.17 billion a year earlier. Issuance of revenue bonds declined 30.9% to $12 billion, while general obligation bond sales fell 39.7% to $8.67 billion.

Negotiated deals dropped 27.3% to $15.32 billion, and competitive sales decreased by 44.4% to $5.07 billion.

Taxable bond volume was 57.9% lower to $1.23 billion from $2.91 billion, while tax-exempt issuance decreased by 35.5% to $18.33 billion. Minimum tax bonds increased to $1.12 billion from $441 million.

The volume of deals wrapped with bond insurance grew 5% to $1.73 billion in 110 deals from $1.65 billion in 147 deals.

Only two of the 10 sectors saw year-over-year increases, as transportation gained 19% to $3.57 billion from $3 billion and housing saw a modest 3.2% improvement to $838 million from $812 million.

"It is curious that pretty much the only sector that is up year-over-year is Transportation," said Foux. "With all the talk about fixing the Infrastructure it is a sign of things to come, in our view."

The other eight sectors saw a decline of at least 15.7%. The biggest drop was in electric power, which was 71.9% lower to $303 million from $1.08 billion.

As for the different types of entities that issue bonds, only one was in the green. Colleges and universities increased 74.8% to $2.42 billion from $1.38 billion. All of the others saw a decrease of at least 12.4%. The biggest decline came from state governments which dropped 59.2% to $972 million from $2.38 billion.

California overtook Texas as the top state issuer, as the Golden State has issued $8.21 billion and the Lone Star State is right behind with $7.64 billion. The Empire State is in third with $4.92 billion, followed by the Keystone State with $3.12 billion and the Prairie State rounds out the top five with $2.67 billion.

As far as staying close to last year's pace, Foux said that issuance should pick up somewhat in March, though he doubted volume will match March 2016 volume of $42 billion.

"We do not think that we are getting anywhere close to that number this year," he said.

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