Low interest rates and strong demand caused total short-term note sales to inch up by $1.25 billion to $17.83 billion in the first six months of 2016 from $16.53 billion over the same period last year.
While the 7.5% increase is a modest rise, at least one municipal expert said the trend may pick up momentum as interest rates remain historically low and unchanged in the near term, municipal experts.
"The Fed raised rates in December and then advertised they would do more, but with the volatility and downturn in February, it became clear to the issuers that the Fed raising short-term rates never came to fruition," said Dan Heckman, senior fixed income strategist U.S. Bank Wealth Management.
"We haven't seen the Fed being very aggressive at all," he added. "I think the Fed has lost some level of its credibility."
As a result, financing any aid, especially short-term notes, became "very advantageous" for issuers in the first half, according to Heckman, who said he is not surprised that issuance spiked in general – and specifically in four of the first six months.
January, March, May and June saw increases of 63.3%, 46.9%, 7.2%, and 2.2%, as volume reached $1.91 billion in 127 issues, $2.86 billion in 188 issues, $2.08 billion in 186 issues, and $8.42 billion among 394 issues, respectively, according to data provided by Thomson Reuters as of July 21.
While new-money volume rose just 8.3% to $17.76 billion among 1,139 issues compared with $16.39 billion among 1,118 last year, refundings declined by 60% to $74.7 million over 10 deals, when the market saw 12 deals last year totaling $186.7 million.
The positive growth in many of the key sectors of the short-term note market is impacting the upward trend, Heckman said.
"Issuers are paying very little and at the same time there is healthy demand from buyers who have interest in owning that type of paper," he explained. "The issuers are paying incredibly low interest rates and so it's a very cheap funding source" for their short-term cash flow needs.
"It really creates a dynamic where why wouldn't you want to fund some needs with short-term debt? It's hard to turn down" the extremely low borrowing costs, Heckman added.
Issuers seeking cash flow in a variety of sectors added to their borrowing in the first half, including the transportation sector, which catapulted by a whopping 652.5% with 34 issues totaling $1.97 billion, versus last year's 23 issues totaling $262.9 million.
Development saw the second highest growth in volume, jumping 592.2% with $177.9 million in just eight issues – the same amount as the first six months in 2015, but last year's amount totaled $25.7 million.
A 200% increase was the third largest spike and took place in the environmental facilities sector, with $3.3 billion of issuance with just one deal, compared to last year's one deal, which totaled $1.1 billion.
While colleges and universities showed a higher percentage growth at 695.5%, its debt rounded out the first half with $795 million among seven transactions, which was well above the $100 million it borrowed among just one deal last year.
Meanwhile, the revenue sector saw a 176.6% increase to $3.10 billion among 47 transactions, when las year the sector's issuance totaled $1.12 billion among 29 issues. General obligation note debt fell 4.8% to $14.72 billion in 1,105 deals, on the heels of $15.46 billion in issuance among 1,104 deals last year.
Tax-exempt issuance inched up by 2.5% and totaled $16.17 billion among 1,054 deals, versus last year's $15.78 billion among 1,063 deals.
Some municipal experts said the slight uptick in the first half of 2016 is not representative of the larger picture that has recently been impacted by economic factors at the state and local levels.
"The lack of growth in infrastructure spending and a general atmosphere of austerity has limited not only long-term financing, but also start-up borrowing, such as bond anticipation note sales," said Alan Schankel, municipal strategist at Janney Capital Markets.
"This issuance slowdown is not reflected in year over year data, since the same conditions applied last year, but it is evident from longer term trend data," he noted, pointing out that note sales in all of 2015 were $34.5 billion, which pales in comparison to all of 2010 when note sales peaked at $65 billion.
But Heckman predicted that overall tax-exempt short-term note issuance could continue to increase as the market awaits the Fed's eventual move to higher rates.
"I don't see in the cards at all for rates to move much and the short end is so incredibly attractive to issue debt in," Heckman said.
"I think the trend will maintain, with a slight increase, since there is very low pressure on short-term interest rates" through 2017, he said. "I think there's very little that the Fed is going to do at this stage in the game," Heckman added.
Other said they expect state issuance to continue to decline going forward as it has in previous years since the 2009 recession.
"While states are still stressed by a slow recovery — some obviously more than others — liquidity should be showing significant improvement over time, implying less issuance," said Mark Tenenhaus, director of municipal research at RSW Investments.
However, that excludes a certain amount of issuance that can be expected to be relatively stable, such as in cases where states issue notes for cash flow needs between the receipt of tax revenue and expenditure transfers due to local school districts.
Heckman maintained there was strong demand for the increased note product in the first six months of the year given the new money market regulations expected in the latter part of the year.
Effective in October, Securities and Exchange Commission rules will require floating net-asset values and impose liquidity fees and redemption suspensions under certain conditions.
The new regulations are adding more pain to funds that have been plagued by seven years of the Federal Reserve's zero interest-rate policy, analysts have previously said.
But, Schankel of Janney said the demand for notes has been diminished, in his view, by the persistent low rates as well as anticipation of more stringent MMF regulations going forward.
