Volume climbs back to 'normal' a year after tax reform

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Municipal bond issuance increased 29.2% in February from a year earlier, when volume took a hit from changes in U.S. tax laws.

Volume ended the month at $23.24 billion in 576 transactions, up from $17.98 billion in 563 deals in February 2018, according to data from Refinitiv.

Tom Kozlik, an independent municipal analyst said that it is hard to compare February 2019 to February 2018 issuance because of the impact from the Tax Cuts and Jobs Act of 2017.

“It is impossible to make an apples to apples comparison to last year’s issuance, because so many bond sales that would have come in the first quarter accelerated to the end of November and December 2017,” he said.

“I expect issuance to pick up in coming months,” he said. “So, I do not expect that $22 billion-ish months to be the norm going forward for the year."

Although the pace of the primary muni market has felt slow to market participants, volume has already surpassed 2017 first quarter volume in the first two months of this year. After the first three months of 2017, volume was sitting at $39.49 billion in 1,145 transactions. After the first two months of 2018, volume stands at $47.85 billion in 1,152 deals.

“Muni supply is historically below average in January and February, then starts picking up in late first quarter and into the second quarter," said Mikhail Foux, managing director of municipal research at Barclays Capital. "We think that 2019 will follow this general trend,”

Foux said last year was an aberration, as an estimated $40-to-$50 billion was pulled out of the first half of 2018 into the fourth quarter of 2017.

“Historically, January - February issuance is close to $25 billion; so we are pretty close to the average, maybe just slightly lower,” he said.

The market is currently “issuer friendly” and if interest rates fall further, Foux said it should lower the cost of issuing bonds.

“It is a little surprising to us that we have not seen more issuance, but we believe that it is going to change in the near future,” he said.

Refunding volume for the month jumped 39.7% to $2.95 billion in 96 deals, from $2.11 billion in 81 deals a year earlier. New-money volume rose 27.6% to $18.02 billion from $14.12 billion.

Combined new-money and refunding issuance was 29.4% higher from February 2018 to $2.26 billion, while issuance of revenue bonds gained 32.4% to $12.86 billion and general obligation bond sales rose 25.5% to $10.39 billion.

Negotiated deal volume was higher by 38.9% to $17.38 billion, while competitive sales increased 31.9% to $5.68 billion.

Taxable bond volume increased to $1.87 billion from $750 million, while tax-exempt issuance rose by 25.6% to $20.65 billion. Issuance of bonds with interest subject to the Alternative Minimum was 9% lower to $720 million from $791 million.

Variable rate deals with long/no put jumped to $1.25 billion from $130 million. Fixed rate deals were up 26.3% to $21.54 from $17.05 billion.

“Variable supply was up a lot last year, this typically happens when investors get concerned about rates,” said Foux. “Same goes for long-dated debt with shorter puts. In addition, as the long-end continues to struggle that’s a good way for issuers to incentivize investors — another reason we see more variable and puttable debt.”

Deals wrapped by bond insurance for the month dropped 24.1% to $966 million in 77 deals from $1.27 billion spanning 69 transactions the same time the prior year.

Analysts said demand for municipals continues to be strong, and as the market gets closer to tax season, it should only grow stronger, especially on the long-end.

“We think that retail demand will increase, especially for munis in high tax states and the AMT debt,” said Foux. “However, I have problems believing that muni - Treasury ratios decline much more for bonds with maturities if 10-years and shorter.”

Kozlik agreed, noting that tax season is very likely to jump start investor interest in municipals.

Seven sectors gained from year-earlier levels, while issuance by the rest of the sectors declined at least 24.6%. Utilities' muni sales increased 87.8% to $3.21 billion from $1.71 billion; transportation deals increased 30.9% to $2.62 billion from $1.99 billion; housing issuance was up to $1.93 billion from $1.23 billion, healthcare deals increased to $1.19 billion from $406 million, education volume jumped to $7.16 billion from $5.72 billion, environmental facilities borrowin surged to $456 million from $1.1 million and general purpose deals gained 14.1% to $5.85 billion from $5.13 billion.

“There’s a lot more issuance in the education and healthcare sectors," Foux said. "Supply in the first half of 2018 was low as a big chunk was shifted into 2017, as [issuers] responding to a threat to issuance of private activity bonds. We will likely see more education and healthcare bonds this year, a substantial portion will be taxable; hence, also more taxable supply.”

Four types of issuers increased volume, led by state governments which sold $3.39 billion, up from $1.06 billion. State agencies increased sales to $6.28 billion from $4.24 billion, local authorities raised $3.32 billion, up from $2.08 billion. Colleges and universities' issuance rose to $1.22 billion from $448 million.

“It looks like the state government, higher-ed and healthcare sectors were the catalysts for higher issuance in Feb 2019 compared to the year before,” said Kozlik. “Those were the sectors that accelerated issuance into November and December of 2017.”

California continued to lead all states in terms of muni bond issuance. Issuers in the Golden State have sold $7.31 billion of municipal bonds so far this year; Texas moved up to second with $4.90 billion; New York dropped down to third with $4.59 billion; Massachusetts was next with $2.92 billion; and New Jersey rounded out the top five with $2 billion.

Michigan was next with $1.98 billion, followed by Colorado with $1.57 billion, Florida with $1.53 billion, Illinois with $1.39 billion and Washington with $1.31 billion.

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