Municipal bond volume dropped for a fourth straight month in May, falling 19.8% from a year earlier as new money deals failed to take up the slack from a plunge in refundings.

Monthly volume fell to $34.25 billion in 1,009 transactions from $42.71 billion in 1,304 deals in May of 2016, according to data from Thomson Reuters. Refundings plummeted 38.2% to $10.33 billion in 234 deals from $16.69 billion in 545 deals a year earlier.

Natalie Cohen, managing director, municipal securities research at Wells Fargo Securities said that the pattern for the year is that refundings are down and new-money transactions, though down in May, are up year to date.

Natalie R. Cohen

“Refinancings have washed out of the market for now and there has been a noticeable increase in borrowing for new projects,” she said. “Today’s market is not the market as we knew it, when we had all those refundings.”

At this point last year, issuance totaled $178.25 billion. Issuance to date for 2017 stands at $154.48 billion.

“Overall issuance is down year to date through the end of May, mostly driven by lower refunding activity,” said Tom Kozlik, managing director and municipal strategist at PNC. “I expected this and would be surprised if it did not continue through the end of 2017."

New money issuance also decreased but not as dramatically, falling 14.3% to $13.89 billion in 685 transactions from $16.22 billion in 638 deals in May 2016.

“When you talk about new money alone, yes it was down in May but year to date it is up from the last three years because we have seen more borrowing for infrastructure,” Cohen said.

Triple-A Municipal Market Data yields were trending down all month, as 30-year has been sitting below 3.00% and the 10-year lower than 2.00%. The 2027 through 2047 maturities were moved one basis point higher on May 9 and since then, that range has been either unchanged or lowering in yield daily, according to MMD.

Tom Kozlik

Kozlik said there is a misconception about what is driving the trend in issuance.

“Sure, rates are low. But issuers are being mindful of their fiscal condition,” he said. “Pensions and infrastructure needs are crowding out spending. Revenues are not rising at the same rate that expenditure demand is climbing.”

More issuance won't materialize until revenues can be identified to pay off additional debt, he said.

“No, I am not surprised by the new money issuance levels. I saw this materializing back at the end of 2012," Kozlik said. "There is currently an expenditure squeeze. Additional revenues, probably in the form of higher taxes or fees, will need to be identified before new issuance picks up.”

The value of combined new-money and refunding deals for the month rose to $10.02 billion from $9.79 billion a year earlier. Issuance of revenue bonds declined 25.1% to $21.38 billion, while general obligation bond sales fell 9.3% to $12.87 billion.

Negotiated deals dropped 10.4% to $28.26 billion, and competitive sales decreased by 35% to $5.68 billion.

Taxable bond volume more than doubled to $3.25 billion from $1.48 billion, while tax-exempt issuance decreased by 19.1% to $29.63 billion. Minimum tax bonds decreased to $1.36 billion from $4.59 billion.

“There is higher interest in taxable munis from foreign and corporate investors, because of the higher yields and the fact that they are considered to be pretty safe,” Cohen said.

The volume of deals wrapped with bond insurance declined by 27.1% to $1.81 billion in 141 deals compared with $2.49 billion in 171 deals a year earlier.

The sectors were split evenly, with five posting year-over-year gains and five posting declines. The biggest improvement came from the development sector, which expanded to $2.59 billion from $831 million. Housing increased to $2.12 billion from $1.54 billion and education improved to $12.36 billion from $10.79 billion. On the other end of the spectrum, electric power saw the biggest drop to $205 million from $1.18 billion. Transportation fell to $3.22 billion from $9.21 billion.

As for the different types of entities that issue bonds, only four were in the green. State governments increased sales 66.2% to $2.45 billion from $1.47 billion, districts improved to $8.88 billion from $7.74 billion, colleges and universities increased their deal total to $1.67 billion from $781 million and tribal governments went to $20.8 million from $8.5 million.

“One thing I noted as a result of the 2016 election last November was that there were many pro-infrastructure related projects approved by voters,” said Kozlik. “I think this could help support new money issuance but will come nowhere close to making up for the drop in refunding activity.”

Volume decreased at least 5.7% for the other types of issuer. The biggest declines came from direct issuers, who issued no bonds this past month versus $154 million from the same time last year and state agencies dropping to $8.76 billion from $14.31 billion.

California retained the status of top state issuer, as the Golden State has sold $31.73 billion so far this year. New York is No. 2 with $18.04 billion with Texas right behind in third with $15.18 billion. Pennsylvania is next with $6.78 billion and Ohio rounds out the top 5 with $4.75 billion.

Cohen said that she sees volume being slow and steady for the foreseeable future.

“You will see a bunch of big projects but mostly maintain and repair,” she said. “We are in a new volume time period.”

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