Municipal volume dries up as refundings take a free-fall

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Municipal bond volume entered the summer doldrums, falling 20.1% in July as refundings plummeted and an increase new-money deals wasn't enough to pick up the slack.

July volume fell to $23.39 billion in 635 transactions from $29.29 billion in 1,014 deals in July of 2016, according to data from Thomson Reuters.

“July was one of the lowest supply months in recent history,” said Mikhail Foux, director of research at Barclays Capital. “Late summer is typically slow, but this year it was a bit of an extreme.”

Refundings dropped 52.8% from a year earlier to $6.13 billion in 157 deals from $12.99 billion in 395 deals.

“Going into the year we expected a 50/50 split between new-money and refunding, for two main reasons: fewer bonds to refund and rates are substantially higher than last year,” Foux said. “To partially offset this, short-dated rates are notably higher, making refunding more attractive. After seven months, we are effectively at 50/50 – so this little surprising how much refundings dropped in July. But there is a lot of noise in monthly data.”

Peter Block, head of municipal research at Ramirez & Co., said he is not surprised at the drop of refundings.

“We are still seeing the fall-out effect from the swarm of refundings last year,” he said. “The annual is $163 billion and my half-year forecast is mostly on target at $82 billion versus $78 billion of actual refundings so far this year.”

Block said this pattern is likely to continue for the remainder of the year, due to the fact that issuers refunded as much as they could last year, including advanced refundings. Budget austerity and the uncertainty over policy under the new administration add to the slowdown, he said.

“Because it is so hard to predict what will happen with things like tax reform, healthcare reform and infrastructure, you have to fall back on facts and historical patterns and that is what has happened with refundings,” he said.

Block also noted that out of the 10 biggest deals of the year so far, seven of them have been mostly refundings – including the top two largest deals of the year so far: California’s $2.28 billion and the $2.11 billion from Hudson Yards Infrastructure Corp.

New money issuance increased 9.5% to $12.03 billion in 414 transactions from $10.98 billion in 542 deals in July 2016.

“New is money is up, which is definitely good news for us,” Foux said. “Refundings will start declining in the coming years, new money will have to pick up the slack, or total supply will meaningfully drop.”

The value of combined new-money and refunding deals for the month dipped to $5.24 billion from $5.32 billion a year earlier. Issuance of revenue bonds declined 26.8% to $13.54 billion, while general obligation bond sales fell 8.6% to $9.85 billion.

Negotiated deals dropped 18.1% to $16.76 billion, and competitive sales decreased by 5.7% to $6.73 billion.

Taxable bond volume dipped to $1.48 billion from $2.11 billion, while tax-exempt issuance decreased by 23.3% to $20.42 billion. Minimum tax bonds more than doubled to $1.49 billion from $542 million.

Deals wrapped by bond insurance were down 6.3% year over year to $1.33 billion in 95 transactions from $1.42 billion in 111 deals.

Only four out of 10 sectors saw year-over-year increases. Education was up 10.3% to $7.11 billion from $6.45 billion. Environmental facilities finished the month up to $156 million from $66 million, transportation was up 30.5% to $5.05 billion from $3.87 billion and general purpose nudged up to $7.48 billion from $7.41 billion.

“Education and transportation are still of the most active issuance sectors, in a big down month, these two sectors are actually up year-over-year,” said Foux.

The other six sectors saw a decrease of at least 39.7%, with electric power posting the biggest drop for the second month in a row, this time down 84.7% to $108 million from $702 million. Health care issuance dropped 72.8% to $1.17 billion from $4.31 billion and public facilities declined to $206 million from $1.37 billion.

As for the different types of entities that issue bonds, only one was in the green. Local authorities inched up to $3.61 billion from $3.59 billion. Volume for all other entities fell at least a 12.9%, with colleges and universities dropping down 71.6% to $237 million from $834 million. Counties and parishes declined 52.9% to $1.23 billion from $2.61 billion.

“We expect to see a pickup in issuance in the fall,” said Foux. “Supply should be healthy, but will likely be substantially lower than last year, when August-September-October were simply off the charts as issuers were placing their deals ahead of elections and the FOMC meeting.”

The state of California remained as the state with the most combined issuance, a place it has sat in all year. The Golden state has issued $39.78 billion so far this year. New York is second with $27.52 billion followed by Texas with $21.44 billion. Pennsylvania is next with $9.64 billion and Wisconsin rounds out the top five with $7.26 billion.

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Sell side Bond volume Primary bond market State of California Hudson Yards Infrastructure Corporation State of New York State of Texas Commonwealth of Pennsylvania State of Wisconsin