Municipal bond issuance rose for the third month in a row in May, raising expectations that volume is on a path toward normalcy.
May 2018 volume was still down to $30.92 billion from $38.71 billion a year earlier, according to Thomson Reuters data. Issuers completed 985 transactions, off from 1,203 in May 2017. One month from the halfway point of the year, muni volume is sitting at $125.60 billion, roughly 22% lower than the $161.69 billion of muni sales at this point a year ago.
New-money issuance increased 53.3% to $23.82 billion in 820 deals, up from $15.60 billion in 794 deals a year earlier.
“The main trend is of course not surprising: refundings are down massively compared to last year, as a result of the elimination of advance refundings," which were banned under the new Federal tax law, said Mikhail Foux, director of municipal research at Barclays Capital. "Meanwhile, new money issuance is up. We believe that this trend is firmly entrenched this year and possibly in 2019.”
Supply has picked in the second quarter from the first quarter, when volume reflected the absence of deals that were issued in fourth quarter of 2017 as municipalities sold bonds early ahead of the tax legislation.
“May is a second $30 billion month in a row, but I doubt we see a $40 billion month this year,” Foux said. “June’s supply will also likely be in the $30 billion range, and issuance typically declines in July and through August. Our 2018 gross long-dated supply forecast is $280 billion, we are on pace to slightly exceed this number, but likely not by much.”
Tom Kozlik, managing director and municipal strategist at PNC noted that back in 2011, issuance did not ‘normalize’ until June, after Build America Bonds expired.
“So I think we are closer now, except we need to remember that now comparing to the previous year is not a good comparison because of the ban on advance refundings,” he said.
Refunding volume dwindled to $5.39 billion in 135 deals from $12.21 billion in 293 deals a year earlier.
Combined new-money and refunding issuance plummeted 85.2% to $1.61 billion, while issuance of revenue bonds dropped 22.3% to $19.21 billion, and general obligation bond sales fell to $11.71 billion from $14 billion.
Negotiated deal volume was down to $21.41 billion and competitive sales increased by 45.3% to $9.19 billion.
“As a share of total issuance, competitive deals should increase – May is not a one-off,” said Foux. “Low supply and rate volatility incentivizes larger, more established issuers to go the competitive route, where they get better transparency and at times better execution.”
Kozlik added that the uptick may also reflect the increased amount of new money sales, and less complicated deals, as well as the fact that there are requirements in some states that make issuers price new-money only deals on a competitive basis.
Taxable bond volume dipped to $2.53 billion from $3.61 billion, while tax-exempt issuance decreased by 20.5% to $26.68 billion. Minimum tax bonds dipped to $1.71 billion from $1.53 billion.
Fixed-rate bonds issuance fell to $28.91 billion from $36.13 billion, while sales of variable-rate short put bonds dropped 68% to $490 million and long variable-rate deals rose 48.7% to $1.19 billion from $799 million.
“Long-dated FRN issuance is up, which typically happens when rates increase, as investors are starting to worry about durations of their portfolios. Meanwhile, from the issuers’ point of view FRN is one way of dealing with the loss of advance refundings,” Foux said.
Three of the 10 sectors showed year-over-year increases, as electric power transactions more than tripled to $988 million from $306 million, transportation deals rose to $5.92 billion from $3.77 billion and general purpose bonds gained to $6.41 billion from $5.87 billion.
The other seven sectors were in the red with the biggest drops coming from environmental facilities, which fell to $41.9 million from 436.9 million; development, which was at $466 million compared with $3 billion; and health care at $1.93 billion from $4.44 billion.
Four types of issuers were in the green. Direct issuers were up to $742 million from $91 million, colleges and universities increased to $2.67 billion from $1.74 billion, state governments gained to $2.66 billion from 2.58 billion and tribal governments to $69 million from $21 million.
“Part of the reason transportation and general government monthly issuance is up, is because of the large par of individual issues,” said Kozlik. “Something to note here is that we might be seeing issuers finally increase their new money issuance. For years issuers were not doing this because they were repairing their balance sheets.”
California continues to have the most issuance among states so far in 2018. The Golden State has issued $19.56 billion; New York is second with $15.67 billion; Texas is third with $12.19 billion; Pennsylvania is next with $7.35 billion; and New Jersey rounds out the top five with $4.78 billion.