Municipal bond volume was surprisingly strong in August.
Data from Thomson Reuters shows August volume slipped to $34.03 billion in 899 transactions from $46.73 billion in 1,248 deals in August of 2016, when the market was on its way to yearly record. Before that, the last time August issuance was as large was in 2009.
“If you look at volume this past month and you compare it to an average August, I would say what we got this year is not bad at all,” said Robert Wimmel, head of the municipal fixed income team at BMO. “Although it has felt slower than what it actually is in terms of volume, a lot of people are feeling down because we are coming off that record year last year and we will see a net negative issuance this year, which doesn’t help the tone of the market.”
Wimmel said issuance could perk up a bit in October and November, and average months the rest of the year, annual volume will be around $350 billion – only 15% to 20% less than 2016.
Refundings dropped 37.3% from a year earlier to $12.57 billion in 305 deals from $20.03 billion in 539 deals. New money also decreased 8.1% to $15.14 billion in 523 transactions from $16.48 billion in 595 deals in August 2016.
"We continue to be in an unusually low-rate environment, with the prospect of rising rates in the near future, so municipalities are taking advantage while they can, and refunding existing debt," said Kevin Dunphy, managing director and head of public finance for Mitsubishi UFJ Financial Group. "Lower new money issuance overall increases the perception that there is `a lot' of refunding occurring."
The value of combined new-money and refunding deals for the month dipped to $6.34 billion from $10.22 billion a year earlier. Issuance of revenue bonds declined 23.1% to $19.69 billion, while general obligation bond sales fell 32.1% to $14.34 billion.
Negotiated deals dropped 25.6% to $24.53 billion, and competitive sales decreased by 19.4% to $9.05 billion. Taxable bond volume sank to $2.06 billion from $3.82 billion, while tax-exempt issuance decreased by 28.3% to $30.49 billion.
Minimum tax bonds soared to $1.47 billion from $396 million, reflecting big airport bond deals which commonly come at least in part with AMT bonds.
“It has been a well performing sector recently and it seems as though investors are more frequently seeking those dedicated revenue streams,” Wimmel said.
President Trump said last night that he wants to push tax reform, which would include a repeal of AMT, something that could have ripple effects on the muni market.
Deals wrapped by bond insurance were down 10% year over year to $2.03 billion in 148 transactions from $2.26 billion in 165 deals.
The only sector to see year-over-year increases was transportation, which gained 69.2% to $6.33 billion in 36 deals from $3.74 billion in 46 transactions.
"Although the transportation sector has deferred maintenance and new investment, and may be starting to undertake some necessary spending, there are still a lot of issuers in the sector waiting for a federal infrastructure plan to materialize," Dunphy said.
Volume decreased at least 3% for each of the other nine sectors, with electric power posting the biggest drop for the third month in a row, this time down 82.5% to $252 million from $1.44 billion.
As for the different types of entities that issue bonds, none were in the green. The entities saw at least a 7.3% decrease, with colleges and universities taking the biggest tumble, falling to $571 million from $2.22 billion.
The state of California remained as the state with the most combined issuance, as it has all year. The Golden state has issued $46.38 billion so far this year. New York is second with $29.54 billion, followed by Texas with $24.85 billion. Pennsylvania is next with $10.84 billion and Florida rounds out the top five with $8.06 billion.
Dunphy said he doesn't see issuance increasing anytime soon, as the probability of a late rate hike is declining. With the lower revenues and political uncertainty, issuers are not rushing to the markets, and finance officers are reluctant to add expenses.
"Issuers are in a wait-and-see mode, with uncertainty at levels not experienced with past new administrations," he said. "Prior administrations have telegraphed their intentions, provided more information, and remained more consistent in their messaging, so issuers had a better sense of what might happen. Now, on issues ranging from tax reform to healthcare to infrastructure, few details are available upon which to make decisions like issuing additional debt."