September muni volume drops 19%

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Municipal bond volume fell 19% in September, as the third quarter ended with a whimper.

Volume in September stumbled to $23.94 billion in 693 transactions from $29.69 billion in 842 issues in September of 2017, according to Thomson Reuters data. Issuers completed 693 transactions, off from 842 in September 2017. It was the lowest September volume since 2015.
Analysts downplayed the decline, saying issuance may be poised to pick up. New-money issuance in the ninth month of the year increased 23% to $19.06 billion in 581 deals, from $15.49 billion in 477 deals a year earlier.

“I wouldn’t put any extra stock into the low data in September this year," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. "We lost essentially two weeks with the Labor Day holiday and then this past week with the Fed meeting,”

Mikhail Foux, director of municipal research at Barclays Capital said that while September volume has surprised the firm on the downside, "August has surprised us on the upside, so it sort of evens out.” He added: “Supply in early September is typically slow, but the other weeks were relatively robust, and the current pace will likely continue for some time.”

Heckman said volume has started to normalize after a steeper decline in the first half of the year.

“Supply this year has been and will continue to be either flat or down,” Heckman said. “Issuers are being cautious and it was about this time last year, when the tax reform rush started – so the comparisons to last year are going to be skewed.”

Refunding volume plunged 70% to $2.69 billion in 85 deals, from $8.97 billion in 432 deals a year earlier.

“Refundings represented a very small portion of total, close to 10% of issuance this month,” said Foux. “Given that there was a drop in long-term new money issuance in 2008 at the onset of the financial crisis, (which drives the current refunding activity), we do not expect a lot of refundings for the next 3-6 months both outright and as a percentage of total. Meanwhile, new money issuance is actually up compared with 2017, which is consistent with this year’s trend.”

Combined new-money and refunding issuance dropped 58.1% to $2.19 billion, while issuance of revenue bonds declined 17.4% to $15.67 billion and general obligation bond sales fell 22.9% to $8.26 billion.

With three quarters in the books, long-term muni volume is sitting at $249.4 billion, compared with $293.2 billion for a 14.9% decline from the same period in 2017. The third quarter alone this year accounted for $84.22 billion, down from the $92.2 billion in the third quarter in 2017.

“Given that there are only 6-7 active weeks left in the year, we expect supply in October and the first half of November to be on the heavier side, likely in the $25-30 billion range, though December should be slower, in our view,” Foux said.

Negotiated deal volume was down 16.6% to $16.52 billion and competitive sales rose less than 1% to $7.18 billion.

Taxable bond volume decreased to $1.89 billion from $3.06 billion, while tax-exempt issuance fell by 17% to $21.79 billion. Minimum tax bond issuance fell to $250 million from $379 million.

Deals wrapped by bond insurance dropped 15.9% to $1.40 billion in 101 deals from $1.66 billion over 118 transactions the same time the prior year.

Variable-rate long/no put bond deals were popular in September, jumping to $1.29 billion from $314 million.

“There is a small, but noticeable increase in variable rate supply. When [interest] rates start moving higher, there is more demand for floaters, and issuers answer with more supply,” said Foux.

Half of the 10 sectors showed year-over-year increases, as general purpose issuance rose to $6.14 billion from $4.64 billion, utilities increased to $4.79 billion from $3.54 billion and development gained to $766 million from $471 million to lead the charge.

The other half decreased by at least 39.2%, as education declined to $4.84 billion from $9.09 billion and healthcare fell to $2.03 billion from $3.34 billion.

Just one type of issuer was in the green this month, as deals from counties and parishes increased to $1.36 billion from $863 million. All others saw year-over-year declines ranging from 2.7% to as high as 89.8%.

California continues to have the most issuance among states so far in 2018. The Golden State has issued $36.36 billion; New York is second with $30.78 billion; Texas is third with $26.89 billion; Pennsylvania is next with $11.34 billion; and Colorado is a new entrant into the top five with $8.43 billion.

Asked how the rest of the year will play out, Foux said right now the market seems “a little skittish.”

“We need to see how the heavier pipeline is going to be absorbed,” he said. “It is also important for rates to remain stable. Any market indigestion will cause volatility/fund outflows, and will likely dampen issuance.”

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