Taxable bonds and COVID-19 are two of the main catalysts that helped February municipal bond volume ascend to its highest level since at least 1986, which is as far back as Bond Buyer data tracks.
There was $36.51 billion of volume in February, a 38.4% increase from the activity the market saw in February of 2019. Historically, the muni markets gets off to a slow start issuance wise at the beginning of the year. This was only the fifth time in the past 34 years that volume exceeded $30 billion for the second month of the year. January issuance totaled $29.6 billion.
Muni issuance continued its frantic pace as taxable issuance has taken the market by storm, fears of COVID-19 have pushed benchmark muni yields to all-time lows and issuers are coming to market to take advantage of these conditions.
“Typically the month of February has an average of $24 billion,” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. “But these times are different now, with taxable volume being one key contributor to the difference.”
Taxable bond volume skyrocketed to $9.54 billion from $2.03 billion last year. The majority of taxable deals that have been coming are being used as a refunding — thus leading to refundings increasing exponentially to $15.53 billion from $3.92 billion in February last year. New-money volume dipped 2.4% to $18.51 billion.
Due to insatiable demand, most of the taxable deals have been upsized from original and preliminary par amounts.
At the very beginning of the year, industry folks were estimating that anywhere from 20%-25% of total issuance for the year will be taxable, or about $90 to $100 billion.
“We will see more taxable issuance than people thought at beginning of year,” Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, said. “Especially now that yields are as low as they are, issuers are going to want to get out there now and get these deals done and projects started.”
Muni yields have hit fresh record lows multiple times already to start the year — and as of press time, yields were sitting at 0.94% on the 10-year and 1.52% on the 30-year, but rates will inevitably move even lower until there is a positive report about COVID-19.
“There is more that we don’t know about COVID-19 than what we know,” Kozlik said. “It is spreading rapidly but we don’t know everything about the identification of it; is it seasonable like the flu? I don’t think we know exactly what we are dealing with. The markets are trying to digest what we know and what we don’t know but is doing the best it can with limited info that we have.”
Kozlik added that only a year ago, the industry was talking about rates and yields mover higher, but that it just emphasizes how quickly things can change.
Issuance of bonds with interest subject to the Alternative Minimum nose-dived to $219 million from $1.09 billion in 2019.
Issuance of revenue bonds gained 61.9% to $23.63 billion, while general obligation bond sales rose to $12.89 billion from $11.79 billion.
Negotiated deal volume was up 54.9% to $29.42 billion. Competitive sales increased 7.9% to $7.06 billion.
Deals wrapped by bond insurance in February increased 30.6% to $1.84 billion in 136 deals from $1.420 billion in 98 transactions the same month last year.
Six sectors increased volume in February, with general purpose making the biggest jump, to $12.98 billion from $5.79 billion. Transportation issuance increased to $6.25 billion from $3.30 billion and healthcare volume rose to $2.25 billion from $1.46 billion.
Four types of issuers increased levels from a year ago, while issuance by the rest of the sectors declined at least 2.1%. Local authorities rose to $13.23 billion from $3.99 billion, colleges and universities increased to $2.42 billion from $1.28 billion and district issuance was higher to $6.69 billion from $4.85 billion.
Texas took the reins from California as the top state of muni bond issuance so far in 2020. So far this year, all issuers in the Lone Star State have accounted for $10.65 billion. Ohio is second with $8.49 billion (this includes the more than $5 billion Buckeye Tobaccos), New York is third with $7.25 billion, California’s fourth with $5.52 billion and Pennsylvania rounds out the top five with $3 billion.
“I am expecting elevated issuance levels for the foreseeable future,” Kozlik said. “Once we get to end of spring and into the summer, I expect to tick up even more.”
Heckman agreed, noting that is makes “no sense” for issuers to be sitting out just based off on where yields are.
“The reality is, we think if you are a taxable issuer or even a tax-exempt issuer who might be up against limits exempt issuance, you should be jumping in with both feet into the taxable pool,” he said. “Regardless of what kind of paper they want to issue, I don’t know why any issuer would be hesitant. If I were them, I would do anything and everything I could to get to market now, as opposed to later.”
