Municipal bond issuers flooded the primary market with deals in September, as volume increased 26.3% to $47.28 billion — the highest issuance in the month on record, dating back to 1986.
This marks the fourth month in a row in which monthly volume has exceeded $40 billion, an occurrence that did not even occur during the record-breaking volume year of 2017 when there was a total of $448.6 billion.
There were 1,121 deals in September, which compares to $37.43 billion in 988 transactions in the same time of last year. The previous volume record for the month occurred in 2016 when the market saw $39.79 billion in the month.
“We were not surprised by the amount of issuance for the month of September, as it is simply a continuation of a very favorable funding landscape for issuing debt that began soon after the Federal Reserve formally offered support to the muni market in March,” according to Brian Musielak, senior portfolio manager for Commerce Trust Co. “While it took a few months for the market to regain its footing, volume has been surging since July on the back of historically low and stable borrowing rates.”
With three quarters now in the books, year-to-date volume stands at $341.82 billion in 9,107 transactions, a large increase from the $280.73 billion in 7,987 deals through the first three quarters of 2019.
Taxable munis fueled the fire, as they have all year, now up 115.9% year-over-year to $16.02 billion.
“In our view two events impact taxable muni issuance going forward,” said Musielak. “They would be higher yields, which eliminate or reduce refundings significantly and secondly, tax policy change, which would reinstating issuers’ ability to advance refund outstanding debt with tax-exempt issues.”
“The taxable supply which remains approximately 3.0 times over last year’s levels while tax-exempt supply is in-line with last year’s levels,” Francis and Mohanty said.
Year-to-date total of taxables is $102.58 billion, getting closer to the $151.88 billion the market produced in 2010.
The COVID-19 pandemic commenced in March and hammered the municipal and global markets. Dealing with the repercussions of the pandemic has been a work in progress with various paces of recovery peppered across the country.
“U.S. Municipal market activity was at the rock bottom level due to COVID-19 during March but started showing the sign of recovery after Fed’s intervention, which was evident in the market in following months and continues to stabilize,” Nikhil Francis, associate, and Saswata Mohanty, assistant director, from the investment banking group at Acuity Knowledge Partners said. “This helps in boosting the confidence among the players in the municipal market.”
Third-quarter issuance alone is up 26.5% year-over-year to $135.50 billion from $107.11 billion. Long-term muni volume has grown with each passing quarter thus far in 2020. Sources asked, "will the trend continue in the fourth quarter?"
“The only obstacle we see to lower volume in the last quarter would be a big spike in yields similar to say what we experienced after the 2016 election or a substantial surge in COVID-19 cases that would rattle investor confidence,” Musielak said. “From purely a policy standpoint, we see the election more as a tailwind for munis regardless of the outcome.”
New-money issuance was up 19.8% to $27.85 billion and refunding volume increased 42.5% to $13.80 billion.
Unless yields move even lower, refundings of higher coupon debt will eventually run their course, according to Musielak.
“One driver for new-money issuance going forward will be a federal infrastructure bill,” he said. “We continue to believe there is strong bipartisan support and a high probability some version gets signed in 2021.”
Issuance of revenue bonds was 52.9% higher to $31.06 billion, while general obligation bond sales fell to $16.22 billion from $17.12 billion.
Negotiated deal volume climbed 31% to $36.95 billion. Competitive sales jumped 27.7% to $9.85 billion.
Deals wrapped by bond insurance in September surged 74.6% to $3.53 billion in 194 deals from $2.02 billion in 140 transactions the same month last year.
Musielak thinks the current backdrop is conducive for a record amount of issuance in October.
“Issuers will be anxious to take advantage of the current low borrowing costs while avoiding any potential volatility surrounding the election in November,” he said.
Seven sectors were in the green year-over-year for the month.
Public facilities elevated to $2.96 billion from $301 million, utilities swelled to $5.24 billion from $3.01 billion, general purpose deals moved higher to $15.15 billion from $10.26 billion, development bond deals increased to $1.04 billion from $715.4 million, transportation transactions trekked higher to $9.31 billion from $7.17 billion, health care rose to $2.43 billion from $2.07 billion and housing gained to $2.23 billion from $1.96 billion. The other three sectors saw a decline of at least 15.3%.
“For the few sectors that experience lower volume, we feel believe it has more to do with an ability, and in some cases affordability, to issue debt than willingness or need,” Musielak said. “Take higher-ed for example. This is clearly a sector that has investors concerned particularly for smaller to mid-size universities. This concern has resulted in higher borrowing which reduces savings for refunding. In addition, all colleges and universities are evaluating what physical campuses will look like going forward. The days of issuing debt to build luxurious dorms and massive student centers may be a thing of past.”
Five types of issuers increased volume from a year ago, while issuance by the rest of the others declined at least 30.6%. Issuance from state agencies rose 71.4% to $16.73 billion from $9.76 billion, cities and towns saw a 58.7% increase to $6.36 billion from $4.00 billion, local authorities’ increased 27% to $8.29 billion from $6.53 billion, counties and parishes’ gained 23.3% to $2.65 billion from $2.15 billion and districts moved higher to $9.07 billion from $7.81 billion.
After three quarters, California continues to lead all states in terms of long-term muni bonds sold so far this year. All issuers in the Golden State have accounted for $51.54 billion. Texas is second with $44.88 billion, New York is third with $39.32 billion, Florida follows in fourth with $15.73 billion and Ohio rounds out the top five with $15.55 billion.
The rest of the top 10 are: Pennsylvania with $14.17 billion, Massachusetts is next with $10.83 billion, followed by Illinois at $9.91 billion, then Michigan with $8.87 billion and last but not least, Virginia with $8.20 billion.
