Muni volume resumes its slide

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Municipal bond issuance fell 7% March, as the market adjusts to an environment without advanced refundings.

Volume ended the month at $24.25 billion in 616 transactions, down from $26.08 billion in 745 deals in March 2018, according to data from Refinitiv.

Although volume slipped for the month year-over-year, it is up 14.4% for the quarter. After the first three months, volume sits at $75.03 billion in 1,869 deals, compared with $65.56 billion in 1,889 sales in the same period last year.

“The most disappointing month so far is March, as it deviated the furthest from what it historically does,” Sean Carney, managing director and head of municipal strategy at BlackRock. “Going back the past five years, there has typically been a 45% increase in volume from February to March but that was not the case this year.”

Refunding volume for the month dipped 7% to $3.59 billion in 91 deals, from $3.86 billion in 131 deals a year earlier. New-money volume dropped 5.1% to $16.34 billion from $17.21 billion.

“The market is still adjusting to an environment without advanced refundings,” Carney said. “All the components are there for a pick-up in issuance: low yields, good ratios, strong demand. The fact that we haven't seen an increase in issuance leads me to believe that is the cause.”

Eric Kazatsky, Portfolio Manager, Clark Capital Management, said that he doesn’t believe the muni market is getting advance refundings back anytime soon.

“At this point, the willingness of either party to go back and edit tax reform is really slim,” he said. “Tax reform was the biggest win of [the Trump] administration and I think they will leave that stone unturned.”

Muni demand has only gotten stronger as the tax deadline approaches and it won’t slow much, if it all, after tax season is over, Carney said.

“Demand is driven by retail and based on what we have seen so far, tax refunds are down and people are realizing the implications of tax reform, “ Carney said. “We have seen record demand from [Investment Company Institute data] this year and it will remain robust for the remainder of the year."

Carney said average subscription levels so far this year are 3.6 times over and 10.1 times over in the high-yield space.

“At the beginning of year, it was more of a cash-building environment and now, some of that cash is in process of coming off the sideline,” Carney said.

Combined new-money and refunding issuance was 13.7% lower from March 2018 to $4.33 billion, while issuance of revenue bonds fell 28.2% to $10.10 billion and general obligation bond sales rose 17.8% to $14.15 billion.

Negotiated deal volume dropped by 4.9% to $15.84 billion, while competitive sales dipped 2.4% to $8.14 billion.

Taxable bond volume jumped by 58.5% to $2.95 billion, while tax-exempt issuance decreased by 10.6% to $20.97 billion. Issuance of bonds with interest subject to the Alternative Minimum was 56.3% lower to $332 million.

Deals wrapped by bond insurance for the month dropped 33.5% to $1.09 billion in 100 deals from $1.65 billion in 109 transactions the same time the prior year.

Four sectors gained from year-earlier levels, while issuance by the rest of the sectors declined at least 7.7%. General purpose muni sales increased 21.3% to $10.07 billion from $8.29 billion; housing deals increased 76.1% to $1.82 billion from $1.03 billion; public facilities issuance was up to $953 million from $949 million, environmental facilities deals increased to $177 million from $29.5 million.

Three types of issuers increased volume, led by cities and towns which sold $3.93 billion, up from $3.52 billion. Districts increased sales to $4.93 billion from $4.45 billion, and colleges and universities sales were up to $679 million from $452 million.

“There is a lot of complaining about lack of issuance but the fact of that matter is that despite all the good things going on in the muni market, it is an unpopular time to be issuing debt on the local level,” Kazatsky said.

California continued to lead all states in terms of muni bond issuance. Issuers in the Golden State have sold $14.31 billion of municipal bonds so far this year; New York moved up to second with $8.39 billion; Texas dropped down to third with $7.65 billion; Massachusetts was next with $3.41 billion; and Illinois rounded out the top five with $2.90 billion.

Florida was next with $2.41 billion, followed by Michigan with $2.37 billion, Pennsylvania with $2.29 billion, New Jersey with $2.19 billion and Colorado with $1.92 billion.

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