Municipal bond volume evaporated in January, as the muni market felt the aftereffect of federal tax legislation that had the municipal market drowning in bonds during the final two months of 2017.
Total volume for the month plummeted 53.8% compared to January 2017, to $16.75 billion in 490 transactions from $36.01 billion in 777 transactions, according to Thomson Reuters data. The month went by without a single billion-dollar deal with the exception of RBC Capital Markets' role as sole managing underwriter on a $1.02 billion tax-exempt issue for Main Street Natural Gas, Inc. The second largest negotiated deal was the Port Authority of New York and New Jersey's $832.28 million.
“I am not surprised we started off so slow,” said Mikhail Foux, director of research at Barclays Capital. “As per our estimates, about $40 billion was pulled into December mainly from Q1 2018. We were expecting both January and the first quarter to be well below average.”
Dawn Mangerson, senior portfolio manager at McDonnell Investment Management, agreed saying that the low amount of issuance was not surprising, though declining demand as the month went on was.
“From a desire to put money to work, as the month went on it seemed as though more and more people were waiting on the sidelines with their cash,” she said. “The market is a bit sloppy right now and there has not been a whole lot to choose from.”
Refundings, in the first month without the ability to advance refund that was taken away in the tax law, slid to $1.78 billion in 93 deals from $8.78 billion in 272 deals in January 2017.
New money issuance decreased 11.6% to $14.29 billion in 371 deals to account for the majority of the month's issuance. This is down from $16.17 billion of new money volume in 412 deals a year earlier.
“We remain skeptical that a large-scale new spending package can be passed in an election year,” said Foux. “Even if the infrastructure package is passed at some point this year, we are hard pressed to see additional supply of more than $15 to $30 billion in 2018. We are projecting new money issuance to be up this year, but not related to a new federal infrastructure package.”
Jim Grabovac, senior portfolio manager at McDonnell, was skeptical of the Trump administration's infrastructure plan after the State of the Union address on Tuesday night.
“The proposal was and continues to be right on size and scope and light on funding and specifics,” he said. “It seems to us they spent their wad of money on tax reform, as opposed to infrastructure. State and local governments want to do these infrastructure projects but they don’t have ability, as they continue to be in fiscal austerity. They need government contribution and we are all unsure of when and if they will get it.”
Combined new-money and refunding issuance dropped to $1.04 billion, while issuance of revenue bonds was down 57% to $9.18 billion, and general obligation bond sales fell to $7.57 billion.
Negotiated deals sunk to $10.85 billion and competitive sales decreased by 19.3% to $5.74 billion.
Taxable bond volume fell to $1.93 billion from $3.71 billion, while tax-exempt issuance decreased by 55.1% to $14.15 billion. Minimum tax bonds dropped to $678 million from $806 million.
“We think taxable issuance should increase this year to about $50 billion,” said Foux. “In our base case scenario, we include corporate CUSIPs, and do not foresee any new infrastructure-related taxable muni programs. We should see more POBs, corporate CUSIPs and some taxable advance refundings.”
Long-term variable rate with no put sky rocketed to $2.02 billion from $296 million.
“Variable rate saw an increase and we think that might have to do with new tax code and the inability to do advance refundings, as it is causing more interesting and creative structures and financing solutions,” said Mangerson.
The volume of deals wrapped with bond insurance fell 63.5% to $499 million in 70 deals from $1.37 billion in 109 deals a year earlier.
Only two of the 10 sectors saw year-over-year increases, as public facilities rose 18.6% to $567 million from $478 million and utilities rose 23.5% to $2.78 billion from $2.25 billion.
The other eight sectors declined at least 47% with the biggest drops in terms of par amount from education, which was at $5.90 billion compared with $13.99 billion, health care, at $599 million compared with $1.02 billion, and general purpose which was at $3 billion compared with $6.72 billion.
“Healthcare and housing saw much fewer deals and that is a direct coloration as a lot of those types of deals got pulled forward into the end of the year,” said Mangerson.
State governments finished the month with $1.52 billion in issuance, slightly up from $1.51 billion, making them the only type of issuer to see an increase. Local authorities saw the largest percentage decline of 67.4%, to $2.07 billion from $6.33 billion.
New York has the most issuance among states so far in 2017. The Empire State has issued $2.24 billion, while Texas is second with $1.41 billion. Massachusetts is third with $1.19 billion, while Illinois is next with $1.16 billion and Kentucky rounds out the top five with $1.15 billion.
“Although we expect a very substantial drop in gross issuance year-over-year, in the second half of the year or maybe even starting in the second quarter, we think supply will likely start picking up,” said Foux.