Long-term municipal bond volume ended the year with the highest yearly issuance since 2010, thanks in large part to a blistering first half of the year that saw enormous refunding volume as issuers rushed to market to take advantage of near-record-low interest rates.
Total volume for 2015 finished 19.1% higher to $403.77 billion in 13,237 issues from $339.05 billion in 11,126 issues in 2014. This past year marks only the fourth time since 2007 that the muni market has surpassed the $400 billion plateau.
The year started the year running full speed, as issuance was at $108.49 billion during the first quarter and $118.18 billion during the second quarter. That pace was not sustainable and volume slowed down as the year progressed, accounting for $92.36 billion in the third quarter and then $84.73 billion in the fourth quarter.
"The big story of the year was refundings, the interesting thing was the massive first five or six months of the year, but some of the refunding was cannibalized during that stretch," said Mikhail Foux, director, research, at Barclays Capital.
For the year, refundings totaled $165.67 billion, up 29.5% from 2014's total of $127.82 billion.
New-money finished with $153.86 billion. Combined new-money and refunding deals totaled $84.24 billion.
Although the muni market has not seen as many new-money deals as market participants would like, it still finished the year a modest 5.9% higher than 2014, when there was $145.30 billion of new-money transactions.
"We are always hopeful that we will start seeing more new-money deals but it seems like it is just wishful thinking," said Dawn Mangerson, managing director and senior portfolio manager at McDonnell Investment Management.
The busiest months of the year occurred in March, April and June as the market saw $45.68 billion, $41.10 billion and $40.25 billion, respectively.
"The peak was in March, and one of the reasons for that was that the State and Local Government Series securities window was closed, so everyone rushed to get in before it was too late," said Foux.
Negotiated deals made up $290.33 billion, up 19.5% from 2014's total of $242.99 billion. Competitive sales also saw an increase, rising by 21.5% to $87.25 billion from $71.82 billion in 2014.
Taxable bonds increased 12.4% to $30.30 billion from $26.96 billion. Tax-exempt bonds improved 19.4% to $361.45 billion from $302.74 billion.
"Taxables picked up somewhat, in the healthcare and education sectors," said Foux. "Those all tie in together as usually healthcare and higher education sectors have corporate CUSIPS. If at somepoint we have higher ratios, or tax reform we could eventually see taxable supply increase."
Private placements were up 8.1% to $26.18 billion from $24.23 billion. Fixed-rate bonds were up 22.5% to $337.24 billion from $308.03 billion. Zero-coupon bonds jumped up to $1.69 billion in 205 deals from $959 million in 206 deals. Bank qualified bonds were 13.1% higher to $22.63 billion from $20.01 billion.
Demand for munis was strong for most of the year, as well as outperformance, according to Jim Grabovac, managing director and senior portfolio manager at McDonnell.
"We have better vision looking backward than we do looking forward and when it comes to 2015, we saw strong outperformance for munis relative to Treasuries," said Grabovac. "Driven by commodies and energy market weakness, muni spreads compressed and that is driven by the discussion of the strong demand on the bank side of the equation."
Out of the 10 sectors that we look at, eight of them were in the black in 2015 versus 2014. The environmental facilities sector and transportation sectors were the only ones to be in the red compared to the previous year.
Education had the best year, posting a gain of 47.2% to $126.73 billion in 5,508 transactions from $86.11 billion in 4,490 transactions in 2014. The education sector also saw the most amount of bonds issued, with the second most being the $93.26 billion that went into the general purpose sector.
Electric power improved 43% to $17.41 billion from $12.18 billion. The healthcare sector was up 34.2% to $34.36 billion from $25.60 billion in 2014.
"One thing that I don't see in the breakdown are green bonds," said Foux. "They are definitely trending up and we are seeing it continue to increase as more and more people are starting to not only care about green bonds but take them seriously. As we get to a point where there is a pricing benefit when it comes to green bonds, we will only see more of them hit the market."
When it comes to type of issuer, six out of 10 saw increases. State governments, local authorities, direct issuer and cooperative utilities saw a decline.
State agencies improved 27.8% to $111.56 billion in 1,433 deals from $87.30 billion in 1,074 deals. Districts gained 34.6% to $90.50 billion from $67.22 billion.
One of the other themes of the year was the uneven distribution of supply and demand. The demand for munis this year was quite strong and although it was a good year in terms of volume, the supply could not keep up with the demand.
"One factor of that is bank ownership of munis, which has doubled since 2007 — both in nominal and relative exposure driven principal by the high average credit quality of the market," said Grabovac.
Although strong technicals have continued in 2016, we have not seen the supply pick up yet.
"We need to fix infrastructure and new-money issuance is essentially flat. Going into an election year we probably won't see anything massive but you never know," said Foux.
