June’s $45B closes half on high note
The municipal bond market had a hearty dose of issuance to the tune of $45.29 billion in June, marking the busiest month of the year and the most issuance in the month of June since 2016 when there was $47.96 billion.
The 23.3% increase year-over-year ends a two-month streak of declines and it also keeps 2020 ahead of 2019’s pace of issuance. At the halfway point of the year, muni volume stands at $198.05 billion in 5,458 issues. At this point last year, the market accounted for $173.30 billion spanning 5,095 transactions. New-money issuance was down 3.1% while refunding volume was up 138.8% and taxable issuance was up a whopping 696.7% from last year.
Mikhail Foux, managing director, head municipal research and strategy at Barclays was not surprised by the big volume this past month.
“We anticipated heavy supply in June, the main reason is pent-up demand from issuers as supply in the past three months was anemic, while rates are still very low,” Foux said. “In general, we expect the second half of the year to be even more active than the first, similar to what happened last year.”
Tom Kozlik, head of municipal strategy and credit at Hilltop Securities, also was not surprised.
“We typically see a bump in issuance going into the summer,” Kozlik said. “June is often one of the stronger months of municipal bond issuance so combining that fact with the pent-up supply that was not able to come in March and April we are not at all surprised at the final June number.”
Foux is split on whether the market will see a busier month the rest of the year.
“I am 50/50 on that; on the one hand, $45-plus billion is a very respectable number; on the other hand, yields are still very attractive, and seasonally we typically see a lot of supply in the fourth quarter,” he said. “While the Municipal Liquidity Facility should partially address funding demands for a handful of issuers, the rest will be funded through the primary market.”
Kozlik believes the market could see a larger volume month in the fourth quarter.
“There could still be some issues that were delayed that still have to come to market. We often see issuance bumps in October and November too,” he said.
Foux said Barclays' forecast for 2020 "was and still is between $410 to $420 billion, we seem to be on pace to get into this range.”
“Although taking into account that issuance in the first half of 2019 was much lower than this year, I believe that we will be lagging the last year’s pace in the second half, also probably not by much.”
Foux said there will be more issuance in the second half, than in the first half but not “dramatically” more, with taxables being a driver.
“While March was extremely low, April-May below average; January, February and now June were heavy — so it all balanced out in, but I still see more in the second half,” Foux said. “Taxable supply is one of the main drivers, as we are on pace to $100 billion, which is more than what we expected going into this year. Market volatility is the main headwind, we saw how little was issued in March; so if we see a repeat, although it sounds unlikely to us, supply will be negatively affected.”
Kozlik has the mindset that any possible issuance drivers are connected to potential federal aid for state and local governments.
“If there is meaningful aid for state and local governments at the end of July then new-money issuance could continue at a neutral pace,” he said. “If federal relief does not materialize or the amount of relief is underwhelming then issuer budget belt-tightening by state and local governments would extend to volume there would be less of it.”
“And, we think that the reopening rollback makes it almost certain that DC lawmakers will come up with another relief package in July,” he said.
Refunding volume for the month was up 138.8% to $13.95 billion from $5.84 billion and new-money issuance was down 3.1% to $26.32 billion from $27.15 billion.
New-money issuance was down because of COVID-19 related revenue losses for state and local governments.
“Municipal bond issuers typically do not sell more debt in times of fiscal uncertainty,” he said. “If anything they wait for clarification about what the futures holds so they can better assess their financial situation. There is more uncertainty now than we saw during and in the wake of the Great Recession.”
He added that without federal aid issuance will drop.
“Even with federal assistance there will still be an element of uncertainty and we expect that uncertainty could weigh on decision making about whether to sell debt.”
Taxable bond volume increased 696.7% to $15.79 billion from $1.98 billion in 2019.
Kozlik, who expected taxable refundings to make up a significant amount of issuance this year, and he expects it to continue.
“It was a victory that the municipal bond market-friendly elements, like the reinstatement of advance refundings with tax-exempt bonds, were included in the Moving Forward Act language,” Kozlik said. “It does not appear likely that those municipal bond market-friendly elements are going to be included in legislation that is going to become law anytime soon, however.”
He expects municipal issuers to continue to execute advance refundings with taxable bonds as long as market conditions allow it.
Foux also thinks this trend will continue.
“This trend will definitely continue, in our view, we are on pace for the largest taxable muni year in the post-BAB era,” Foux said. “Taxable advance refundings is still one of the main drivers, but we also see more taxable new-money supply, as at current low yields and elevated muni-Treasury ratios, placing taxable deals makes a lot of sense for issuers.”
Issuance of revenue bonds was 8.3% higher to $26.28 billion, while general obligation bond sales rose to $19.02 billion from $12.49 billion.
Negotiated deal volume increased 60.2% to $37.91 billion. Competitive sales declined 41.0% to $6.63 billion.
“It is a little surprising to us [that competitive deals were so low], but in the environment where market conditions are still challenging, placing negotiated deals is easier; that's why so many issuers go down that route,” Foux said.
Deals wrapped by bond insurance in June rose 46.9% to $4.06 billion in 235 deals from $2.77 billion in 186 transactions the same month last year.
Five sectors were in the green in June: electric power increased to $885 million from $322 million, education issuance grew to $15.47 billion from $9.39 billion, general purpose bonds were 37.6% higher to $11.63 billion from $8.45 billion, development deals rose to $1.04 billion from $515 million and utilities rose by 42.9% to $6.84 billion from $4.78 billion. All the other sectors saw a decline of at least 8.6%.
Five types of issuers increased levels from a year ago, while issuance by the rest of the others declined at least 0.2%. Issuance from state governments rose 14.9% to $3.47 billion from $3.02 billion, colleges and universities saw a 135.6% increase to $2.35 billion from $997 million, cities and towns increased 89.8% to $7.61 billion from $4 billion, bonds sold by districts’ went up by 43.9% to $10.67 billion from $7.42 billion and local authorities gained to $7.89 billion from $7.62 billion.
California leads all states in terms of long-term muni bonds sold so far in 2020. All issuers in the Golden State have accounted for $26.73 billion. Texas is second with $25.47 billion, New York is third with $20.77 billion, Ohio is fourth with $12.52 billion and Pennsylvania rounds out the top five with $9.38 billion.
The rest of the top 10 are: Massachusetts with $7.90 billion, Florida is next with $6.79 billion, followed by Michigan at $5.81 billion, then Illinois with $5.49 billion and Virginia with $5.11 billion.