Lagging taxable and refunding sales drag down municipal bond issuance

September municipal bond issuance volume fell 32.6% year-over-year as a massive drop in taxable and refunding issuance puts the market slightly behind 2020’s record-breaking pace.

Total September volume was $36.085 billion in 856 deals versus $53.513 billion in 1,395 issues a year earlier.

Taxable issuance totaled $6.533 billion in 152 issues, down 63.6% from $17.945 billion in 350 issues a year ago. Tax-exempt issuance was down 10.7% to $28.510 billion in 697 issues from $31.921 billion in 1,079 issues in 2021. Alternative minimum tax insurance dropped to $1.041 billion, down 71.4% from 3.647 billion.

Total issuance so far this year is at $346.48 billion, down 2.4% from $355.01 billion through the end of September 2020.

Volume this September, while much lower than 2020, was still above-average on a historical basis, noted Tom Kozlik, head of municipal strategy and credit at HilltopSecurities Inc.

Some analysts predict total issuance will fall short of last year’s $484-billion-plus record as the year has unfolded with unexpected variables such as the infusion of billions of federal coronavirus relief spending and the COVID-19 Delta variant.

Kozlik said his prediction for about $460 billion on the year stands, with expectations of $50 billion to $55 billion in October and around $30 million each in November and December.

Total taxable volume so far in 2021 is $81.783 billion in 1,636 issues. Taxable volume through the end of September 2020 was $106.538 billion. Taxable volume so far this year eclipses 2019’s full-year total of $72.3 billion.

As a percentage of total issuance, taxables now make up about 24%. In 2020, it was greater than 30%.

The drop in taxables can be attributed to various reasons including volatility and rising rates, which make taxable refundings less viable for issuers.

New-money issuance was also down 20.3% to $24.289 billion in 586 transactions from $30.491 billion a year prior and refunding volume was down 59.7% to $6.654 billion from $17.946 billion in 2020.

Another contributor to the decline in taxables this year has to do with available alternatives such as forward-delivery bonds, which have already broken records for issuance, private placements and the issuance of corporate CUSIP debt.

September experienced greater volatility, compounded by some uncertainty around Federal Reserve policy, legislative efforts in Washington and global macroeconomic events, which contributed to some hesitancy in the issuer community.

“There’s been a confluence of circumstances that have really contributed to this volatility. You had the fear of the Chinese contagion over Evergrande, the [Federal Open Market Committee] meeting, this political paralysis taking place in Washington over the debt ceiling and infrastructure package is still being debated,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc. “So that’s going to all contribute to issuance patterns through the balance of the year.”

Because rates have backed up to end the month, and the market is “falling off of the year-to-date lows in yields, and that’s going to remove a number of the advanced refunding candidates from the calendar,” he said.

And as long as there’s continued backup in rates, that’s going to create a disincentive to aggressively market taxable advance refunding bonds, Lipton said.

But Kozlik noted that because it is unlikely that Washington will pass a massive infrastructure bill that includes municipal-friendly bond provisions in the near future, issuers waiting on the sidelines may “jump in” now before interest rates rise further.

“As long as interest rates stay relatively low, the taxable refunding activity could continue. There could be some issuers that may have been waiting to see if tax-exempt advanced refunding is going to come back,” Kozlik said.

Issuance details
Issuance of revenue bonds decreased 39.3% to $21.842 billion from $35.969 billion in September 2020, while general obligation bond sales fell 18.8% to $14.243 billion from $16.545 billion in 2020.

Negotiated deal volume dropped 32.2% to $27.762 billion from $40.967 billion a year prior. Competitive sales also declined to $8.256 billion, or 23.2% from $10.749 billion in 2020.

Deals wrapped by bond insurance in August declined 29.8% to $2.897 billion in 182 deals from $4.126 billion in 223 deals a year prior.

Bank-qualified issuance dropped to $975 million in 249 deals from $1.45 billion in 385 deals in 2020, a 32.8% decrease.

In the states, California, as usual, led all others so far this year. Issuers in the Golden State have accounted for $56.686 billion, a 4.8% increase year-over-year. Texas is second with $39.441 billion, down 14.6%, New York is third with $37.972 billion, down 4.8%, Pennsylvania is fourth with $14.486 billion, 2.3% lower than a year ago, and Florida rounds out the top five with $12.979 billion, 20.4% decrease from 2020.

The rest of the top 10 are: Illinois with $9.238 billion, down 10.7%; Colorado with $9.174 billion, up 42.4%; Massachusetts at $9.005 billion, down 20.9%; Washington with $8.952 billion, up 18.7%; and New Jersey with $8.798 billion, a 61.9% increase from 2020.

Lynne Funk contributed to this report.

Bonds

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