Municipal bond volume dropped 30% in March and finished under $30 billion, as political and interest rate concerns kept issuers out of the market.
Monthly volume fell to $29.83 billion in 850 transactions from $42.53 billion in 1,191 deals in March of 2016, according to data from Thomson Reuters. It was the third lowest issuance total for March going back to 2008, after the $28.56 million in 2014 and $18.91 billion in 2011.
Analysts said issuance slowed before the March 15 decision by the Federal Open Market Committee to raise the fed funds target by 25 basis points to between 0.75% and 1.00% and the March 27 failure of a Republican plan to overhaul the nation's healthcare law.
"There was elevated uncertainty in March in the run up to the March 15 meeting, with the new D.C. agenda related to healthcare, tax reform, and infrastructure investment adding to the mix," said Alan Schankel, managing director at Janney Capital Markets. "States and cities may be waiting for clarity on enactment of administration spending priorities. For example state budgets would be particularly impacted if Medicaid was reduced and/or converted to block grants."
Schankel said he was surprised by the slower pace of issuance in the first quarter. "Since March was one of the busier issuance months in 2016, the year-over-year differential was particularly pronounced in March," he said.
Dawn Mangerson, managing director and senior portfolio manager at McDonnell Investment Management agreed saying that with the current political climate and heightened risk, slower issuance was to be expected.
"The low volume is nothing to be concerned about," she said. Visible supply "has increased, it looks like things could pick up."
Schankel said issuers are wise to delay infrastructure financing plans until the federal policy details are evident and that healthcare issuers may be reluctant to pursue new capital projects until the debate over replacing the Affordable Care Act plays out.
Schankel said some large electric utilities may be unsure of status of Clean Power Plan, as President Trump moves to ease environmental regulation, and may delay capital projects until there is more clarity.
Total volume for the first quarter dropped 12% to $87.87 billion in 2,352 issues from $100.01 billion in 3,049 issues last year, when the market was on its way to a record for annual issuance.
March refundings tumbled to $7.52 billion in 197 deals from $17.69 billion in 580 deals a year earlier.
"The biggest surprise for me was the fall off in refunding activity," he said. "I am surprised by the significantly slower refunding pace, although I'd note that predictions for a sharp near term rate increase are few, so there should be refunding opportunities ahead."
New money issuance decreased 8.5% to $13.91 billion in 575 transactions from $15.20 billion in 521 deals in March 2016.
Combined new-money and refunding issuance in March dipped to $8.39 billion from $9.64 billion a year earlier. Issuance of revenue bonds declined 32.9% to $15.14 billion, while general obligation bond sales fell 26.4% to $14.69 billion.
Negotiated deals dropped 41.4% to $19.93 billion, and competitive sales increased by 31.5% to $9.09 billion.
Taxable bond volume was 27.6% lower to $1.98 billion from $2.73 billion, while tax-exempt issuance decreased by 31.8% to $26.95 billion. Minimum tax bonds increased to $902 million from $271 million.
The volume of deals wrapped with bond insurance shrank 32.6% to $1.74 billion in 136 deals from $2.59 billion in 177 deals.
None of the 10 sectors saw year-over-year increases, and the minimum percentage decrease was 11.3%. Transportation fell 34.8% to $2.23 billion from $3.41 billion, electric power dropped 63.8% to $500 million from $1.38 billion and education decreased 39.9% to $8.17 billion from $13.60 billion.
"Transportation issuance was down; however I think the recent news about California Gov. [Jerry] Brown calling for $5.2 billion to fix potholes and other improvement/maintenance will be a good thing for the sector," Mangerson said. "California is usually ahead of the curve on these things and I wouldn't be surprised to see more states and municipalities follow suit. We all know California isn't the only place with pothole problems, so this could be promising."
As for the different types of entities that issue bonds, only two were in the green. State agencies increased 3.3% to $9.04 billion from $8.75 billion and counties and parishes rose 19.8% to $2.05 billion from $1.71 billion. All of the others saw a decrease of at least 17.2%. The biggest decline other than direct issuers came from colleges and universities, which dropped 84% to $383 million from $2.39 billion.
"It is good to see the state agency and counties increasing, I am hopeful those entities will pick up the issuance a little bit," Mangerson said. "A lot of places have been postponing service projects and you can only put those off for so long."
California retained the status of top state issuer, as the Golden State has issued $16.48 billion so far this year. New York jumped up to No. 2 with $9.94 billion with Texas in third with $8.88 billion. Pennsylvania is next with $4.02 billion and Colorado rounds out the top 5 with $3.28 billion.
