Notes rose in 2019 on Fed rate movements, issuer needs

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Federal Reserve Board rate cuts and lowered rate expectations helped tip the scale for short-term note issuance in 2019, promoting 7.8% growth to $45.74 billion in 2,247 issues.

This total is up from $42.42 billion in 2,218 issues in 2018, according to data provided by Refinitiv.

Issuance was particularly heavy in the second and third quarters of 2019, but moderated during the fourth quarter. Second quarter issuance totaled $13.9 billion in 704 issues while third quarter issuance grew to $17.6 billion in 684 issues.

“The general sense is that issuers crafted their note schedules more in tune with Fed policy and rate expectations as opposed to conventional cash-flow borrowing needs,” Jeffrey Lipton, managing director of credit research at Oppenheimer & Co., said.

”Our earlier observations for active note sales through June of last year were largely tied to issuer psychology and structural mechanics,” he added.

After the Fed raised benchmark funds rate throughout 2018, and suggested the hikes would continue, it pivoted in early 2019.

"During 2019, the Fed cut the benchmark funds rate three times and signaled a pause, following what appeared to be a tightening bias at the beginning of the year," Lipton said. "Such psychology earlier in the year argued that it would be more practical for issuers to access the short-term note market."

“Given our projections for further downward movement in [Treasury] rates through much of the first half of 2020, we would not expect to replicate the first half 2019 note issuance trends during the first two quarters of 2020,” Lipton said.

A flatter yield curve helped to lift note issuance in the first three quarters of 2019, as issuers recognized value on the short-end of the curve and issuance perked up depending on some issuers’ project timeline.

“Generally, with stronger revenue growth, improved expenditure controls, and consistent allocations to rainy day funds already made, issuers have more capacity to cover their note borrowings,” he said.

The top issuers were New York, Texas, New Jersey and California. After taking the number 2 spot in 2018, New York bumped Texas from the top of the list last year.

Most of the issuance was done via negotiation and fixed rate, with just more than $36 billion in 1,869 issues while competitive sales totaled $8.69 billion in 320 transactions. Private placements made up a little more than $1 billion.

State governments and their agencies sold about $17 billion, while cities and towns issued $12 billion, and districts and their local authorities offered $11 billion.

While contemplating the prospects for higher rates through much of the first half of 2019, Lipton said many issuers were less motivated to convert to long-term fixed rate structures.

“Although austerity measures still applied and the overall national economic profile remained firm during this late-cycle recovery, albeit with slower growth performance, issuers were more comfortable marketing short-term notes for specific purposes,” Lipton said.

Issuance increased in transportation, which was up nearly 283% at $4.2 billion from $1.1 billion a year earlier.

Education fell to $10.1 billion, or about 2%, in 238 issues. The healthcare sector fell to $30.7 million in 5 issues, down from $225 million in 9 issues in 2018.

General obligation notes rose 8.3% to $43.2 billion while revenue notes were $2.5 billion, unchanged from 2018, the data showed.

“With a Fed pivot ... during the year to an easing bias, there was a more compelling rationale to lock in long-term rates and not worry about extension risk,” Lipton said.

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