Municipal bond issuance reached $30 billion for the third straight month, as the market prepares for what is expected to be a slow summer.

June 2018 volume fell to $31.67 billion from $39.30 billion a year earlier, according to Thomson Reuters data. Issuers completed 895 transactions, off from 1,192 in June 2017. At the halfway point of the year, muni volume stands at $161.05 billion, 19.8% lower than the $200.99 billion of muni sales at this point a year ago.

"New-issue volume for the first half is running below the pace of last year, with the entire decline stemming from a drop in refunding volume,” said Jim Grabovac, senior portfolio manager at McDonnell Investment Management. “If there is a bright note, we have seen an uptick in new-money issuance in 2018, but it is difficult to discern amid the overall dearth of available paper.”

Jim Colby, senior muni strategist at VanEck, said he saw a continuation of curve flattening in June, which presented the 30-year spot as the attractive place to be on a ratio basis.

“With the continuing refinancing of tobacco bonds removing yield from portfolios, spreads continued to narrow for most of the remaining yield sectors as managers sought to replace bonds taken out in the refundings,” he said.

New-money issuance increased 34.8% to $26.29 billion in 748 deals, up from $19.49 billion in 747 deals a year earlier.

Refunding volume sank to $3.42 billion in 98 deals, from $12.09 billion in 340 deals a year earlier.

“The visible diminution of the supply of new issues increases the likelihood of annual volume well below $400 billion,” said Colby. “An event, though maybe counterintuitive, might permit municipals to eke out positive returns and outperform other fixed income. Still, the lack of new and meaningful supply is a concern. Without it, spreads cannot reasonably widen back to long-term norms, to attract more investors."

Colby doesn’t expect much volume in July, either.

“Volume in July is not expected to breach $5 billion, as far as I know,” he said.

Grabovac agreed, saying all indications are for an extremely light July calendar, with more of the same in terms of limited volume going forward.

“Given that the downdraft is a result of legislative changes, it is unlikely that we will see a substantive pickup unless and until Congress and the administration were to address infrastructure investment. And given the fiscal profligacy enacted over the past months, that seems unlikely over the foreseeable horizon,” he said.

Combined new-money and refunding issuance plummeted 74.6% to $1.96 billion, while issuance of revenue bonds dropped 28.5% $18.07 billion, and general obligation bond sales fell to $13.60 billion from $14.03 billion.

Negotiated deal volume fell 18.9% to $20.61 billion and competitive sales decreased by 3.3% to $10.23 billion.

Taxable bond volume dipped to $1.66 billion from $3.17 billion, while tax-exempt issuance decreased by 19.3% to $27.68 billion. Minimum tax bonds rose to $2.33 billion from $1.84 billion.

Grabovac said that one of his takeaways from the month, was to some degree of counter-trend movement in the municipal market relative to the taxable market with much of it probably attributable to a lack of available supply.

“Specifically, a steeper yield curve in June and continued spread compression across the quality spectrum. Both trends moved counter to the Treasury and corporate markets in June,” he said.

Three of the 10 sectors showed year-over-year increases, as electric power transactions increased to $1.32 billion from $705 million, housing deals rose to $2.51 billion from $2.03 billion and transportation bonds gained to $6.55 billion from $4.14 billion.

The other seven sectors were in the red with the biggest drops coming from development, which fell to $317 million from $2.37 billion; public facilities, which was at $44

Three of the 10 sectors showed year-over-year increases, as electric power transactions increased to $1.32 billion from $705 million, housing deals rose to $2.51 billion from $2.03 billion and transportation bonds gained to $6.55 billion from $4.14 billion.

The other seven sectors were in the red with the biggest drops coming from development, which fell to $317 million from $2.38 billion; public facilities, which was at $444.6 million compared with $1.51 billion; and education at $7.21 billion from $9.69 billion. Environmental Facilities deals fell to zero from $36.2 million a year earlier.

No types of issuers were in the green. State governments were down to $2.19 billion from $4.19 billion, cities and towns were down to $4.33 billion from $7.04 billion.

California continues to have the most issuance among states so far in 2018. The Golden State has issued $25.82 billion; New York is second with $19.70 billion; Texas is third with $15.44 billion; Pennsylvania is next with $8.45 billion; and New Jersey rounds out the top five with $5.45 billion.

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