The municipal market got off to a fast start in terms of issuance this year, picking up in January right where it left off from 2016’s record-setting totals. However, the pace of issuance has since slowed, leaving 2017 first-half volume lagging last year's levels.
Although this year has felt slow, volume is down just 12.4% compared with last year’s pace. Long-term muni volume finished the first half at $198.71 billion over 5,750 transactions, down from the $226.83 billion in 7,040 transactions seen in the busy first half of 2016, according to data from Thomson Reuters.
The market saw $99.45 billion of that total volume in the first quarter and $124.30 billion in the second quarter of 2016, compared with $108.49 billion and $118.25 billion in the first two quarters of 2015.
The year began with $35.98 billion in January, then dropped way down to $22.99 billion in February, and then picked up a little steam with $32.38 billion in March. From there, it fell to $30.35 billion in April and then sped up with the two highest months of the year with $38.30 billion in May and $38.71 billion in June.
In total, we saw $91.35 billion in the first quarter and $107.36 billion in the second quarter, down 8.7% and 15.3% compared with the first and second quarters in 2016, respectively.
The biggest takeaway has been the decline in refundings, which are down 40.4% for the year to $55.79 billion in 1,623 transactions. That compares with $93.61 billion in 3,044 transactions for the first six months of 2016.
“We knew going into the year that refundings would be down but I feel like there are still bonds out there to be refunded,” said Dawn Mangerson, managing director and senior portfolio manager at McDonnell Investment Management. “In 2007, we saw $429 billion of total issuance, with 63% of that being new-money. Muni yields are around 16 basis points lower today than they were back in 2007, so my question is where are all of those refundings? Maybe we will get a second half of the year supply surprise.”
Jim Grabovac, senior portfolio manager at McDonnell said that munis have been outperforming Treasuries almost all year, especially on the short end of the curve, and that makes refundings easier at the margins – another reason for issuers to refinance.
“We have just continued to see a downdraft of supply, where the market continues to be supply-constrained,” he said. “This infrastructure program, everyone was hopeful that it would come to fruition but it seems to be nowhere on the horizon.”
New-money deals are up, but not nearly enough to bridge the gap from the refunding dip. New-money issuance has totaled $93.91 billion in 3,572 deals compared with $87.66 billion in 3,424 deals during the first half of last year.
Alan Schankel, managing director and municipal strategist at Janney, said that he was not surprised by the moderate increase in new-money.
“Although infrastructure needs are large, resources remain strained, with state and local government issuers trying to contain rising fixed costs, including debt service,” he said.
He also mentioned that uncertainty driven by D.C. debates played a large role in lower new issue volumes.
“Healthcare issuers faced uncertainty during the debate over ‘repair and replace’ initiatives, since a reduction in insurance coverage under various Congressional proposals would mean reduced or slower growth in revenue, “he said. “Electric power utilities potentially face fewer regulatory requirements and less required capital investment with the Trump administration’s rollback of major elements of the Clean Power Plan.”
Schankel continued to say that two major power issuers, Georgia MEAG and Santee Cooper in S.C., both of which borrowed in the first half of 2016, had no 2017 issues as they faced growing uncertainty about construction of their nuclear plants.
“Some infrastructure projects were likely delayed so benefits from any federal program to support infrastructure could be accessed,” he said.
Taxable bonds were up 24.4% in the first half of 2017 to $17.93 billion in 513 transactions compared with $14.41 billion over 570 deals in the first six months of 2016.
“I believe the increase in taxable issuance was due to several reasons - including advance refunding of issues which were already advance refunded, as IRS regulations generally don’t allow use of tax-free bond proceeds for more than one advance refunding,” Schankel said. “Also in the mix were many universities, which more frequently pursue the taxable route to give flexibility on the use of proceeds, aided by the fact that taxable rates were not too much higher than tax-free rates during much of the first half.”