Why muni issuance bounced back in the 2Q

WASHINGTON — Long-term public municipal issuance volume totaled $94.1 billion in the second quarter of 2018, an increase of 52% from the prior quarter but a decline of 6.6% year-over-year, according to an industry report.

That data, along with other information, was released Monday as part of the Securities Industry and Financial Markets Association's latest quarterly report.

The strong second quarter represented a bounce-back from a very weak first quarter, but the $155.9 billion of issuance year-to-date is well below the $179 billion 10-year average through two quarters.

Michael Decker, a managing director and the co-head of municipal securities at SIFMA, said the report is good news for the muni market.

“Second-quarter issuance recovered from the anemic pace of the first quarter,” Decker said. “Also, total returns in the municipal market were generally positive for the quarter, while some other sectors like high-grade corporates generated negative returns during the period, indicating continued strong demand for municipals.”

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Tax-exempt issuance totaled $79.5 billion in the second quarter, up 44.6% from the prior quarter but down 9.1% year-over-year. Taxable issuance totaled $8.1 billion in the second quarter, an increase of 75.9% quarter-over-quarter but a decline of 14.9% from the same time in 2017.

By use of proceeds, general-purpose bonds led issuance totals in the second quarter at $26.7 billion, followed by primary and secondary education at $16.2 billion, higher education at $8.2 billion, water and sewer facilities at $6.5 billion and airports clocking in at $5.6 billion.

Refunding volume rose to 21.9% of issuance from 19.4% the prior quarter, but remained “well below the averages in prior years,” the report said. This was the result of the Tax Cuts and Jobs Act tax reform legislation that eliminated advance refundings after the end of last year, the report said.

The report further credited tax reform for giving state and local governments a revenue boost at the end of 2017, when total state government tax revenue rose 9.4% compared to the third quarter of 2017.

“The TCJA prompted a spike in tax payments and property tax prepayments as high-income taxpayers sought to take advantage of expiring tax breaks,” SIFMA wrote in the report.

Trading activity rose in the second quarter of 2018 to $12.0 billion daily, a 5.4% increase from the prior quarter’s $11.4 billion. Year-over-year, trading activity was up 13.3%. By number of trades, however, trading activity declined 3.8% on a quarter-over-quarter basis but rose 1.3% on a year-over-year basis.

The variable-rate demand obligation market, which many market commentators have said may have revived as an alternative to bank direct purchases under a new corporate tax rate that makes muni ownership less appealing to banks, was relatively quiet. A total of $2.1 billion was issued in the second quarter and outstanding volumes dropped slightly.

Meanwhile, bank holdings of bonds declined to $363.4 billion from $379.6 billion, and bank holdings of municipal loans rose slightly.

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Primary bond market Secondary bond market Tax reform Variable-rate bonds SIFMA Washington DC
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