Tax legislation's impact on 2018 volume was tangible

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Following a late-2017 rush to market of advance refundings and private-activity bonds in the run-up to the implementation of new tax legislation, supply in 2018 -- particularly refunding issuance -- suffered a steep decline.

Total long-term municipal bond issuance was down 23.5% to $343.36 billion from a record-setting $448.61 billion in 2017, according to data from Refinitiv.


“2018 was a year of uncertainty for the municipal market – as we absorbed the impact of tax law changes,” said Alan Schankel, managing director and municipal strategist at Janney. “And searched in vain for signs of a DC infrastructure financing push; and worried about future Fed rate hikes.”

2018 also saw four interest rates hikes and as the Fed continued to raise rates, it put pressure on the entire curve.

Jack Muller, CFA and municipal securities strategist at Citi, said 2018 was transformative, with tax reform altering the composition and mechanics of the demand pool for municipals.

“It was also relatively volatile, given the large selloff followed by the large rally in the second half of the year,” he said.

The quarterly comparison the past two years highlights the impact of the new tax legislation, which banned advance refundings and reduced state and local tax deductions. The muni market started off at a crawl, with $65.7 billion in the first quarter, down 28.8% from the first three months of 2017.

During the middle two quarters, issuance seemed to normalize a bit. The second quarter produced $100.11 billion, off only 7.9% from the previous year’s second quarter. The third quarter's $87.1 billion was just 5.5% off from where it was a year earlier.

Then came the fourth quarter, which ended with a total of $90.42 billion of issuance – a 41.8% decrease from the last three months of 2017.

The year saw only five months were issuance was greater than $30 billion. For comparison, 2017 saw nine months over $30 billion, including that were over $40 billion (October and November) and one month that almost reached $70 billion (December).

Only two months in 2018 saw more volume than the same month the previous year, which were April (up 2.65%) and July (up 11.3%). The total number of transactions also dropped to 9,526 versus 12,055 deals in record-setting 2017.

“The market has moved on from worrying about tax law impact although here may be a further burst of angst in April when taxpayers discover the impact of SALT deduction limits on their tax bill,” said Schankel.

For the year, refundings declined 61% to $59.82 billion from $153.26 billion. New money on the other hand was up 18% on the year to $239.22 billion from $202.8 billion.

For the year, tax-exempt issuance was down 25.2% to $294.24 billion from $393.21 billion and taxable bond volume dipped 19% to $31.50 billion from $38.92 billion. Minimum tax bond deals were in the green, up 6.9% to $17.61 billion from $16.48 billion.

“On the supply side, we think the pain is mostly behind us,” said Muller. “In terms of demand, the law fundamentally changed the attractiveness of municipals to banks and property and casualty insurance companies. We will continue to feel the effects of that.”

Variable-rate deals with long- or no puts were up 51.6% on the year to $12.92 billion from $8.52 billion.

2018 also saw letters of credit increase 50.6% to $2.74 billion and standby purchase agreements improve to $2.54 billion from $1.15 billion.

Only one sector was positive for the year and that was public facilities, which was 21.2% higher to $11.92 billion from $9.83 billion.

This year showed us once again that certain segments of the demand base, in particular mutual funds, vary strongly according to the market’s performance,” said Muller. “Even after rates stopped climbing, it took several weeks for mutual funds to start seeing inflows again.”

He added that in terms of credit, the year also affirmed for Citi that election years have the ability to grease the wheels of political machines everywhere, smoothing out political risk somewhat for the GO market.

“Pennsylvania’s statehouse easily passing its budget after several years of struggling to accomplish that is one big example,” he said.

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