It’s quite difficult to avoid the temptation to assess market conditions at this time of year, so I won’t resist. First half volume of $161B represented a decline of just below 20%. In more stark terms, the decline registers a $40B drop in volume. No one needs to hunt for another reason the market is so rich. This fact accounts for the lion’s share. Continuing positive flows have contributed on a more modest basis.
Much has been said about the forecast for the remainder of the year. In order to reach some of the estimates for volume that have been lofted, there would have to be about $200B of issuance in the second half. This translates to roughly $33B per month. Of course, the supply is never that even over the months with holidays and vacations to consider. At first blush, we have to conclude that this December would be quite favorable if volume was half of the record issuance of last December. The summer lull that used to be a regular feature of the market when I joined is poised to make a re-appearance this year. July is off to a very slow start. The pace will accelerate going into the Fall as we pass more critical rollover periods. However, negative net supply persists.
Some have conviction that advance refunding capability could resurface later this year. As much as we would desire to get on board, we do not see this crystallizing. At the earliest, 2019 would represent more of a viable chance. If a reinstatement were to take place, how would the expressed $1.7B cost to the federal budget be offset? We laud Mayor Benjamin’s efforts to reinstate advance refunding in his role as President of the U.S Conference of Mayors.
Until now, I have refrained from putting too much weight on Fed actions. But the simple truth is that the Fed still commands the stage. Municipals do trade more on the supply/demand features of this discrete market. However, the Fed sets the tone and municipals will continue to track Fed actions in relatively correlated behavior.
Trade policy is one area that could be counted on to create random reactions in the market. Many have said that trade is too difficult to model. I particularly valued one pundit’s observation that if the U.S. does go too far with tariffs affecting Chinese goods, Wal-Mart would not have much to sell at low prices. Farmers are also weighing in on critical exports such as soybeans, rice, broilers, and beef. If the list of items expands beyond what is affected at present, there will be much more to consider in terms of impacts to the economy. Perhaps, there can be some improvement in two way trade over the longer term, but quite a bit of damage can be incurred along the way.
The lack of implementation of an Infrastructure Plan at the federal level is also having an effect. Any hopes of a real plan have been forgone in light of the impacts of tax reform. States and localities are moving forward on their own. California had a marked change in momentum when it enacted its gas tax increase to support infrastructure. The Proposition on the ballot to repeal the increase is most troublesome. Road and bridge improvements are necessary. Funding some improvements from a state surplus may be a sound idea but it is ephemeral. Once a recession appears, said funds would be at risk. Long term infrastructure projects need to be supported by reliable and stable revenue streams.
The deal count has also been directly affected by the downdraft in volume. First half transactions registered at 4,605 versus 5,871 in the same period last year. Some would speculate that the numbers are not so important because the decline would be expected to be in smaller competitive transactions. However, the bulk of the decline has been in negotiated transactions.
There has not been quite the uptick in taxable municipal issuance to match the increase in rhetoric about same. Transportation issuance is also more firm than one would expect given the lack of funding.
Financial challenges are also not as good a predictor of debt issuance behavior. Volume has declined appreciably in Louisiana where there have been budget challenges. On the other hand, issuance increased in New Jersey where budget challenges are ever present. We do note though that the latter number was greatly affected by an outsized tobacco transaction for savings.
Except for California, which still leads in issuance, and Texas, which ranks third,, the high volume states continue to be in the Northeast and Mid-Atlantic regions. We think an infrastructure plan of substance would be expected to change this distribution somewhat, given road and bridge projects across the nation.
There is a more positive tone in the market regarding P-3 transactions. We are still awaiting more volume. State and local control remains a key issue in some markets.
Volume may be expected to be a tad stronger in the second half based on long term trends. The maximum that we can envision is about $27.5B on average per month or about $165B for the second half. We hope we are wrong.
Please, enjoy your summer breaks while the market permits.