The electric power and education sectors were the two municipal sectors that grew the most in volume in the first half compared to the first half of 2019.
Electric power was up 78.5% and education grew 37%. The development sector had the third greatest percent growth with 22%. The increases compare to an overall 18.2% municipal bond issuance increase for the half.
All data is from Refinitiv and all percentages are for changes in dollar issuance volume.
Interest rates declined from Jan. 1, 2019, to June 30, 2020. The Bond Buyer 20-bond index fell about 190 basis points during the period. Taxable issuance grew 249% in the first half of 2020 compared to the first half of 2019.
“Electric power is a sector that is very rate sensitive given the size of their capital programs,” said John Hallacy, president at John Hallacy Consulting LLC, to explain the sector’s growth. “They watch the market carefully and tend to issue when they see optimal conditions. The sector also has some current refunding remaining and they are more inclined to do taxable given the industry they are in.”
Citi Municipal Securities Strategist Jack Muller said the electricity sector generally issues long-term bonds. This makes it inclined to take advantage of the low-interest rate environment. He said at the start of the period the sector had latent maintenance needs.
Muller said education’s increase was triggered by the surge in taxable issuance. Higher education uses taxable bonds a great deal, both he and Hallacy said. Higher education grew 87.2% in the half.
The sectors with the biggest contractions were housing with 9% and transportation with 8.2%.
Hallacy said that mortgage rates had dropped. “The municipal/public sector housing programs tend to have the most demand when rates are high. Also, a lot of low-income projects are just not getting done. There is some lingering fear that subsidies may be going away.”
Muller said transportation dropped because of federal infrastructure policy. The CARES Act provided a significant amount of funds and may have displaced borrowing needs. Some transportation entities are waiting to see if they will get federal assistance.
“In the transit sector, the systems have been so besieged by the downturn that there is some concern whether they will be going concerns or not despite some reserves," Hallacy said. "Ridership may take some time to ramp up again.”
Within the overall municipal market, revenue bond issuance was up 22.3% and general obligation bond issuance was up 12.7%. By comparison, within the development sector revenue bonds issuance was up 17.7% and GO issuance was up 71.8%. Muller said this was possibly an attempt to accommodate retail’s increased demand for better credit quality.
Within education simultaneous with the expansion in higher education issuance there was a 23.8% decline in student-loan-related issuance. Lower rates led to lower issuance because “the student or the student's parents may have other options that are cheaper than student loans. Home equity loans etc.,” Hallacy said.
While the healthcare sector increased 20.1%, single-specialty hospital issuance increased 6531.9%. “Specialty hospitals are rate sensitive,” Hallacy said. “At a time when not as many procedures were being done, it was probably a good time to get ahead on some of the work.” Muller said that the expanding market for taxable bonds helped the area.
While the housing sector declined by 9%, within the sector refunding declined 47.2%. Muller said about 10 to 11 years ago there was a decline in housing bond issuance. The universe of active housing bonds with call dates has declined from last year to this year. Thus there has been less refunding.
The public facilities sector was up 4.3%. Whereas issuance in all sectors went up about 18% each quarter from a year earlier, the statistics for this sector was a 34.8% growth in the first quarter and a 23.7% decline in the second quarter.
“Public facilities rely on tax support,” Hallacy said. “Citizens do not appreciate doing more when the tax base has eroded and there may be a call to raise taxes further.”
Muller explained the pattern by saying that public facilities probably were seeing little use in the second quarter. While public facilities include parks, zoos, and other recreation, most are buildings.
Within the sector, police stations and equipment increased 230.2% and civic and convention center issuance declined 22.5%. “Public safety is on citizens’ minds,” Hallacy said. “The bottom has fallen out of the conference business due to COVID-19 and no one is certain when it is coming back.”
Within the transportation sector, the airport subsector saw a 76.5% decline. “Airport activity of all kinds descended rapidly,” Hallacy said. “It was hard to see when flying would come back in a big way.”
Hallacy explained a 345.5% increase in sanitation by saying that the water and sewer subsectors are sensitive to interest rates. Combined utilities increased 81.5%. On both shifts Hallacy said, “There may be some more mandates coming up and I think some more federal funding is available for projects.”
