Municipal bond issuers brought a record $450.31 billion in long-term debt to market in 2016, driven by a surge in refunding volume as issuers rushed to market to take advantage of historically low rates while they still could.
Volume was up 11.2% year over year from $404.96 billion in 2015, according to data from Thomson Reuters. The record volume was reached over 13,488 transactions, more than the 13,294 deals that came to market in 2015.
"The record amount of issuance in 2016 was a surprise. We thought issuance would be up nicely from 2015, but we were taken back that the second half of the year issuance was even stronger than what we believed would occur," said Dan Heckman, senior fixed-income strategist, U.S. Bank Wealth Management. Jim Colby, senior municipal strategist at VanEck Global said that two things surprised him in 2016: first, the lack of the revitalization of the U.S. economy despite a strong labor market, auto industry and housing market. And the second, bigger surprise, which he said had the greatest impact on overall performance, was the election of Donald Trump and subsequent rout in the fixed income markets.
"I will look back on 2016 as 'the year that almost was', as we saw another top performer year for fixed income and then the election changed everything," said Colby.
During the record year, we saw more than $40 billion in six out of the 12 months, with a high of $54.36 billion in October. The other largest months occurred in March, May, June, August and September. The lowest month in terms of issuance was December, when the market saw just $20.72 billion.
The pace of issuance slowed down after the election, as the surprising result sent a shockwave through the financial markets, causing muni yields to sky rocket.
"I believe we would have seen at least another $10 to 20 billion, possibly more, in issuance," said Heckman. "It is hard to tell because what comes with higher rates and wider spreads is less refundings typically. However, I believe we would have had more issuance in any event if the sell-off wasn't as extreme as it was."
Colby agreed, saying that he believes the market would have likely had another $20-25 billion in issuance through November and December. "December's fall-off gave a much needed boost to year-end performance," he said.
As far issuance breakdown by quarter, the first and last quarters were the slowest, accounting for $100.03 billion and $107.80 billion respectively. The muni business was booming in the middle two quarters, seeing $126.29 billion in the second quarter and $116.19 billion in the third.
At the beginning of 2016, popular opinion suggested there would be multiple interest rate hikes from the Federal Reserve but in actuality, the FOMC increased rates just once, by 25 basis points, in December.
"I think the was real concern over rates moving higher and that the record low level of interest rates and spreads in the summer of 2016, really spurred issuance and issuers to come to market sooner rather than later in 2016 or 2017," said Heckman.
Heckman noted that the low rates were like a 'come and get it while it lasts' type of mentality for issuers, as they saw a great window of opportunity to bring their refunding to market.
"And sure enough it ended up being too much of a good thing and really hurt the market in October and accelerated the selling pressure after the election in November," he said. Refundings totaled $180.06 billion in 5,606 deals, which is 8.3% higher than 2015's total of $166.24 billion in 5,582 deals. New money transactions were not far behind at all, as they increased 14% up to $176.11 billion in 6,663 deals compared to $154.47 billion in 6,559 deals back in 2015.
"Issuance was predictably high in 2016 due to persistent low rates and the great opportunity for refinancing of higher cost debt," said Colby.
Deals that went the negotiated route finished the year with $325.15 billion, up 12% from the $290.39 billion there was in 2015. Competitive deals increased 13.1% to $98.67 billion from $87.25 billion.
Revenue bonds accounted for $270.98 billion in 2016, up from $246.14 billion in the previous year, and general obligation bonds increased 12.9% to $179.33 billion from $158.83 billion in the same period the year before.
"The most remarkable item for 2016 was the record amount of consecutive weekly cash inflows to muni bond funds until it came to a screeching halt later in the year," said Heckman. "The year of 2016 was a wild roller coaster ride: up, down, up, then down again in prices. Even though it ended at the close of 2016 in the opposite direction in terms of cash flows, you could also say it was the year of cash inflows into muni bond funds."
