December downfall: Municipal issuance plunges 68%
Municipal issuance was down two-thirds this December from a year earlier, putting 2018 total volume at $338 billion, nearly a quarter less than the market produced in 2017.
December 2018 volume came to $21.9 billion in just 620 transactions, a far cry from the $69.8 billion in 1,364 deals sold the last month of 2017 when issuers were racing against the tax reform clock to complete deals. For the year in total, issuance totaled $338.39 billion, down 24% from the previous year’s $448.61 billion, according to data from Thomson Reuters.
December was the third lowest volume total month of the year, just behind January’s $21.5 billion and February’s $17.89 billion. Out of the 12 months, year-over-year issuance rose only in April (up 2.6%) and July (up by 11.1%).
“Our industry took a hit after tax reform,” said James Colby, senior municipal strategist at VanEck. “It took full effect from first quarter and then banks and insurance companies selling their munis, put pressure on intermediate part of curve.”
The quarterly comparison the past two years highlights the impact of the new tax legislation, which banned advanced refundings and reduced state and local tax deductions. The muni market started off at a crawl, with $65.5 billion in the first quarter, down 29.1% from the the first three months of 2017.
The middle two quarters, issuance seemed to normalize a bit. The second quarter produced $100 billion, off only 8% from the previous year’s second quarter. The third quarter's $87 billion was just 5.6% off from where it was a year earlier.
Then came the fourth quarter, which ended with a total of $86.4 billion of issuance – a 44.4% decrease from the last three months of 2017.
Colby said there were silver linings.
“There is positive tone for the asset class going into 2019,” he said. “Even with the disruptions we faced, with lower corporate and personal tax rates, the tax-exemption stayed strong as the muni asset class shined as a reasonable portfolio alternative.”
Refunding volume for the quarter dove 93% to $2.54 billion in 90 deals, from $36.50 billion in 594 deals a year earlier. New-money volume fell 35.4% to $15.39 billion. For the year, refundings declined 61.2% to $59.42 billion from $153.26 billion. New money on the other hand was up 16% on the year to $235.3 billion from $202.8 billion.
Dawn Mangerson, senior portfolio manager at McDonnell Investment Management said that bonds are better positioned now for a nice run, than they were a year ago.
“The last month the market has had a really good tone,” she said. “Although there is a lack of correlation between the muni and corporate markets, munis saw good returns this year compared to other asset classes — another justification that it is good to have a portion of your portfolio to have muni holdings, to offset more volatile assets and sectors.”
Combined new-money and refunding issuance was 57.6% lower from December 2017 to $4.03 billion, while issuance of revenue bonds declined 67.7% to $17.69 billion and general obligation bond sales fell 71.6% to $4.36 billion.
Negotiated deal volume fell to 62.5% to $19.21 billion, while competitive sales dropped 68.6% to $2.15 billion.
“The supply deceleration was no surprise but it didn’t make it any easier to deal with,” said Jim Grabovac, senior portfolio manager at McDonnell. “The rate changes we saw over the year were mild in context of huge swing of market emotion.”
Broader market reaction, the rate changes are mild in context of huge swing of market emotion
Taxable bond volume decreased to $1.92 billion from $8.06 billion, while tax-exempt issuance fell by 67.9.3% to $19.06 billion. Minimum tax bond issuance dropped to $975 million from $2.38 billion.
For the year, tax-exempt issuance was down 25.9% to $291.47 billion from $393.21 billion and taxable bond volume dipped 23% to $29.95 billion from $38.92 billion. Minimum tax bond deals were in the green, up 6.2% to $17.50 billion from $16.48 billion.
Deals wrapped by bond insurance for the month dropped 52% to $1.39 billion in 75 deals from $2.91 billion spanning 123 transactions the same time the prior year. For 2018, bond insurance fell 18% to $18.90 billion in 1,248 deals from $23.05 billion in 1,637 deals.
Variable-rate deals with long/no puts were up both for the month and the year. For December, those deals were up 53.7% to $2.42 billion from $1.57 billion and for 2018, they were up 50.8% to $12.85 billion from $8.52 billion.
2018 also saw four interest rates hikes and as the fed continues to raise rates, it puts pressure on entire curve.
“As we go to higher rates in munis, the re-investment opportunities are not paid close attention to in terms of re-entering the market place with better yields,” said Colby. “We may not be seeing the rollover reinvestment as much as we have over the last few years, but those dollars can go in at higher yields as the market adjusts and I think the tax-exemption will continue to prevail.”
2018 also saw letters of credit increase 47.9% to $2.69 billion and standby purchase agreements improved to $2.54 billion from $1.15 billion.
For the month, all sectors and types of issuers were in the red. For the year, public facilities was the only sector in the green as it was up 17.7% to $11.57 billion from $9.83 billion. All other sectors saw at least a 3.4% decline.
Direct issuers was the only issuer-type that saw year over year increases, as it was up 18.4% to $2.25 billion from $1.89 billion. All other issuer types saw at least an 8.8% decrease.
California concludes the year with the most issuance among states. The Golden State issued $47.83 billion; New York is second with $41.60 billion; Texas is third with $32.61 billion; Pennsylvania is next with $13.32 billion; and Illinois rounds out the top five with $13.07 billion.
Florida is next with $12.31 billion, followed by New Jersey with $11.26 billion, then Colorado with $10.55 billion, Washington with $9.18 billion and Ohio with $8.11 billion.
With 2019 practically here, Colby added that the New Year will see calls and coupons supporting the muni market, not new issuance.
“2019 should allow the tax-exempt coupon to carry more weight as far as total returns go,” he said. “We have seen greater demand and less supply in 2018 and I don’t see that improving much in 2019. Diminishing new issue supply has played a positive role as far as returns go.”