February fallout: Monthly issuance hits 18-year low

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Municipal bond volume fell further in February, in another ripple effect of the new tax law and the rush of issuance leading up to its enactment.

Total volume for the month dropped 36.1% to $14.95 billion in 472 transactions from $23.38 billion in 806 transactions in February 2017, according to Thomson Reuters data. It was the lowest February volume since 2000.

The continuation of weak supply is surprising,” said Robert Wimmel, head of the municipal fixed income team at BMO. “You typically see some uptick in issuance as you head into March, but I don’t feel any issuance momentum building. Visible supply has ticked up a bit, but I won’t believe it until I see the deals cross my desk.”

Tom Kozlik, managing director and municipal strategist at PNC, said he isn't surprised, given that about $50 billion of issuance that might have taken place in 2018 was accelerated into the last two months of 2017.

“We need to be patient,” he said. “Issuance patterns did not ‘normalize’ until about June back in 2011 after BABs issuance was accelerated into the end of 2010. Supply could take some time to recover to a more usual level.”

Wimmel said many investors underestimated the volume that was pulled into December 2017 from tax reform concerns.

“Lower rates won’t help supply as we no longer have the rate sensitive advance refunding deals," he said. "We just need to wait out this trough in supply. Fortunately, the dealers had built up sizable inventories at the end of last year. The lack of new issues has allowed them to pare that down to more normal levels and given buyers some relatively new product to add to portfolios.”

Market participants said legislation to spur infrastructure might spur issuance, but there is "zero chance it will impact issuance this year," according to Wimmel.

“A crucial oversight is that the Executive branch ignores the new fiscal reality state governments are facing,” Kozlik said. “Rainy day balances are low. Structural imbalances exist throughout the country. Notable among credit drivers is that spending on Medicaid and other fixed costs such as pensions have become an increasing percentage of state budgets over the years.”

Refundings were scarce in February, sliding to $1.99 billion in 65 deals from $6.03 billion in 260 deals a year earlier.

New money issuance decreased 14% to $11.53 billion in 380 deals to account for the majority of the month's issuance. This is down from $13.41 billion of new money volume in 476 deals a year earlier.

“Investors have had cash to spend, particularly over the past three weeks, but there is nothing attractive to buy because of the lack of supply,” said Wimmel. “Yes, in January the rising rates pushed many investors to the sidelines. But rates have risen enough for us to feel comfortable putting money to work. The problem is, there’s nothing to buy.”

Combined new-money and refunding issuance dropped to $1.42 billion, while issuance of revenue bonds was down 40.2% to $8.14 billion, and general obligation bond sales fell to $6.81 billion from $9.79 billion.

Negotiated deals sunk to $10.87 billion and competitive sales decreased by 23.7% to $3.88 billion.

Taxable bond volume fell to $703 million from $1.82 billion, while tax-exempt issuance decreased by 31.7% to $13.96 billion. Minimum tax bonds dropped to $282 million from $1.12 billion.

Long-term variable rate with no put fell to $70.4 million from $540 million.

“SIFMA did jump pretty significantly back at the end of December, but the level has since normalized,” said Kozlik. There are several advance refunding options issuers can consider, but we have not yet seen them move into variable rate debt options.”

The volume of deals wrapped with bond insurance fell 40.8% to $1.15 billion in 60 deals from $1.94 billion in 127 deals a year earlier.

Only two of the 10 sectors saw year-over-year increases, as electric power rose 81.6% to $572 million from $315 million, public facilities rose 49.3% to $600 million from $402 million and utilities was slightly up to $4.41 billion from $4.38 billion.

The other eight sectors declined at least 16.5% with the biggest drops coming from education, which was at $4.92 billion compared with $9.24 billion, health care, at $305 million compared with $1.98 billion, and transportation which was at $1.53 billion compared with $3.60 billion.

No type of issuer was in the green this month, as counties and parishes were down only 5.4% year-over-year to $1.32 billion from $1.39 billion. All others saw a drop of at least 21.6%.

California has the most issuance among states so far in 2017. The Golden State has issued $2.46 billion, while Texas is second with $1.82 billion. Pennsylvania is third with $1.62 billion, while New York is next with $1.19 billion and Utah rounds out the top five with $840 million.

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