Long-term municipal bond volume was 9.9% ahead of 2020’s record-breaking pace at the halfway point of 2021.
After the first six months of the year, bond volume stood at $231.18 billion in 6,584 transactions, compared to $210.35 billion in 5,900 deals at the same time last year, according to data from Refinitiv.
The municipal bond market set a record for issuance in 2020 at $483.6 billion.
In the first quarter, volume was up 16.7% year-over-year to $111.24 billion from $95.28 billion and second quarter issuance increased 4.2% to $119.94 billion from $115.07 billion.
“Volume is higher than last year, which feels surprising, as the market has been trading as if it is supply constrained,” according to Jim Grabovac, investment strategist at Loomis Sayles. “That, of course, is counterbalanced by the huge demand that the market has experienced since the initial stages of market recovery from the crisis.”
He added that historically, issuance usually picks up in the second half of the year and there is “a good chance at matching or exceeding last year's pace.”
Tax-exempt issuance was up 11.8% to $168.90 billion in the first half from $151.13 billion a year earlier, while taxables dipped 0.8% to $56.52 billion from $66.65 billion.
Three out of the first six months saw declines in volume year-over-year, with the decreases coming in January, February and June.
Grabovac believes that drop in June after three months of increase stems from uncertainty over the infrastructure package brewing in Congress.
“Some issuers were taking a wait-and-see approach to determine if exempt advance refunding could return and hesitating, as they were waiting for clarity on the infrastructure package (and) didn't want to add to debt levels if they were going to get some sort of federal funding,” he said.
Taxables started the year off on a high note, finishing the first quarter up 24.9% to $30.18 billion from $24.16 billion and then dropped 19.8% in the second quarter to $26.34 billion from $32.84 billion.
“The deceleration of taxable issuance is reflective in the lower number of refunding issuance relative to last year,” Grabovac said. “There is a good chance to come close to what we got last year for taxables at roughly $65.25 billion.”
He added that in 2020 the split between tax-exempt and taxable was roughly 70% for exempts and 30% for taxables and this year, it is closer to a 75%-25% split.
“Taxables are definitely here to stay,” he said, noting that legislation is the “wild card” going forward.
“Legislative changes could impact whether or not taxable issuance increases or decreases,” he said. “If for example, if they bring back advance refundings at some point, all refunding activity would come back to the exempt market, and we would see that as a $100 billion swing.”
Dawn Mangerson, vice president, head of municipal portfolio management at Loomis Sayles & Co., said she gets the sense that issuers who can get it done in the exempt market with a forward delivery are getting better yields than going taxable.
“Institutionally, when looking at tax-exempt versus taxables with the same name/credit, we have seen issuers pick up 30 basis points with the 21% tax rate,” she said.
New-money volume jumped 35.3% to $154.40 billion from $114.13 billion, while refunding volume dropped 21.3% to $52.48 billion from $66.65 billion.
Mangerson noted that issuance could have been much higher in the first half, if it were not for the unprecedented fiscal stimulus.
“A lot of issuers with stimulus money may not need to issue as much as they did a year ago; lots of them are in good shape financially,” she said. “But for many it was and still is an enticing debate, as with rates so low — and won't be this low forever — they are tempted to tackle some long-term projects and lock in the low rates.”
