First-half muni primary market volume is flat year-over-year
One and a half years after new tax laws came into effect, municipal bond volume for 2019 is even with issuance in the first half of 2018, begging the question: is this the new normal?
June was the highest-volume month of 2019, with $33.19 billion of municipal bonds sold in 983 transactions, down 0.6% from $33.39 billion in 998 issues in June 2018, according to data from Refinitiv.
With the first half in the books, 2019 volume totals $166.82 billion in 4,826 deals — nearly matching the $165.68 billion in 4,812 issues halfway through 2018. Though total volume is close, there is a stark difference between the first and second quarters of each of the past two years.
Volume for the first quarter of this year was up 19.1% year-over-year to $78.09 billion from $65.56 billion, but the second quarter was down 12.9% to $87.17 billion from $100.11 billion.
Tom Kozlik, director and head of municipal strategy and credit at Hilltop Securities Inc., said the new lower normal level of volume is likely to be around for a bit.
“The catalyst to higher volume could be the point where more refundings are able to be executed,” Kozlik said. “To that end we believe one of the key reasons issuers are holding back on selling more bonds despite the need is in fact credit-related.”
He said issuers that have been or are using austerity measures, although they are not being called “austerity” specifically in most cases. Also, some are holding off on adding more debt because some are sensitive to adding more fixed costs at a time when revenues are not rising at a level that could balance out the added expenditure.
“Additional amounts needed to satisfy pension funding is definitely a factor here too," Kozlik said. "We see this in other areas too; employment levels for state and local government in many places are still below where they were before the 2008 recession.”
The annual volume totals have also felt low because the muni market was spoiled by big years in 2016 and 2017, when those two years alone combined for a total of $893.4 billion.
Kozlik said the rest of this year volume wise could follow along closely with what was seen in the second half of last year.
"I think what the market should expect is a scenario where monthly levels of $35-$40 billion plus are increasingly rare on a consistent basis, all things being equal,” Kozlik said. “There are barriers issuers are facing that are constraining volume. Those barriers are not the same everywhere. They differ regionally and sometimes are slightly different for neighbors. But those barriers surely exist even though we are in the 10th year of an economic expansion.”
Mikhail Foux, managing director of municipal research at Barclays Capital, said that while it was very surprising to see the muni volume so low in the first half of the year, he believes that it will pick up in the second half.
“Some factors that might spur issuance include: low rates; tax-exempt refundings of callable BABs; an increase in new money issuance as municipalities are losing hope for a federal infrastructure package until 2021 or even later,” Foux said. “I think, in general, the volume will follow a similar pattern as 2018, but we expect it to be heavier in the second half of 2019 compared with last year.”
Foux added that technicals are still very strong as retail demand has dramatically increased in 2019. But on the flip side, as Treasury yields go lower, it will be harder for tax-exempts to keep up with U.S. Treasurys.
“Additionally, we expect the pace of retail inflows to decline compared with the first half of the year; while supply should increase. To summarize, we are expecting a more difficult market environment in the second half this year.”
Refunding volume for the month fell 14.8% to $4.87 billion in 166 deals from $5.72 billion in 124 deals a year earlier. New-money volume dropped 2.3% to $25.04 billion. Combined new-money and refunding issuance was 60.4% higher from June 2018 to $3.28 billion.
Issuance of revenue bonds grew 11.8% to $21.69 billion and general obligation bond sales decreased 17.9% to $11.49 billion.
Negotiated deal volume gained 1.7% to $21.51 billion, while competitive sales increased 9.8% to $11.23 billion.
Taxable bond volume declined 25.8% to $1.36 billion, while tax-exempt issuance declined 2.2% to $28.55 billion. Issuance of bonds with interest subject to the Alternative Minimum was 37.3% higher to $3.29 billion.
Variable-rate short put debt sank 34.1% to $553 million from $1.14 billion and variable-rate long/no puts increased 34.1% to $2.00 billion.
“The transportation sector remained very active, a big chunk of these deals are subject to the AMT,” Foux said. “With respect to long-dated floaters, the SIFMA index remains extremely elevated (although it will likely decline in July after the quarters end); consequently, investors find value in long floating rate notes that are priced off SIFMA. Responding to investor demand, issuers bring more floaters to the market.”
Deals wrapped by bond insurance for the month rose 51.3% to $2.55 billion in 166 deals from $1.69 billion in 129 transactions the same month last year.
Six sectors gained from year-earlier levels, while issuance by the rest of the sectors declined at least 18.8%. Utility muni sales increased 27.9% to $3.97 billion from $3.10 billion, general purpose bonds grew 23.9% to $9.12 billion from $7.36 billion, education deal volume increased to $8.15 billion from $7.79 billion, environmental facilities deals climbed to $600 million from $124 million, health care issuance grew 10.5% to $2.83 billion and development bonds were up slightly to $462 million from $441 million.
Three types of issuers increased volume in June, while the rest suffered decreases of at least 8.4%. Issuance from state governments rose 34.9% to $2.95 billion from $2.19 billion, local authorities were up 31.2% to $6.47 billion from $4.93 billion and counties and parishes issuance grew 17.4% to $2.47 billion from $2.11 billion.
California continued to lead all states in terms of muni bond issuance. Issuers in the Golden State have sold $25.19 billion of municipal bonds so far this year; New York was in the second spot with $16.14 billion; Texas kept third with $16.05 billion; Florida was next with $9.17 billion; and Pennsylvania rounded out the top five with $8.58 billion.
Massachusetts was next with $5.73 billion, followed by Michigan with $5.04 billion, Ohio with $4.87 billion, then Illinois with $4.79 billion and finishing the top ten is Arizona with $3.94 billion.
Kozlik doesn’t expect July issuance will exceed June’s.
“June is typically a relatively big month and July less, especially because of the 4th of July holiday,” he said. “So I do not think July is going to be higher than June. It almost never is.”
Foux said Barclays expects a relatively robust supply in July, with issuance likely surpassing last year’s volume of $27.74 billion.
“We see a number of sizable deals in the pipeline for July and early August, as issuers are taking advantage of low rates.”