August municipal bond issuance declined 23% year-over-year, led by a drop in taxable and refunding volumes, as issuers continued to sit on the sidelines amid rising interest rates.
Total August volume was $33.651 billion in 618 deals versus $43.885 billion in 1,162 issues a year earlier, according to Refinitiv data. Taxable issuance totaled $6.188 billion in 54 issues, down 27.6% from $8.542 billion in 194 issues a year ago. Tax-exempt issuance was down 26% to $24.547 billion in 555 issues from $33.191 billion in 956 issues in 2021 and alternative-minimum tax issuance rose to $2.916 billion, 35.5%, from $2.152 billion.
New-money issuance rebounded, rising 5.5% to $29.732 billion in 571 transactions from $28.184 billion a year prior.
Refunding volume decreased 81% to $2.063 billion from $10.830 billion in 2021.
Historically, August tends to be a pretty strong month for issuance, and that trend continues even if issuance is down year-over-year, said Tom Kozlik, head of municipal research and analytics at HilltopSecurities. This year's drop, to a level below the 10-year average of $35.861 billion, is driven by the Fed's most recent rate hikes.
The Federal Open Market Committee implemented 75 basis point rate hikes at both its June and July meetings after a 50-basis-point increase in may and a quarter-point liftoff in March. At least a 50 basis point rate hike is expected at the September meeting, although a 75-basis-point move will be considered.
"I'm absolutely not surprised we saw issuance slow down the way that did in June, July and now in August," Kozlik added. "And this is likely going to be the kind of pace, the kind of attitude that issuers are going to have for the rest of this year, if not into next year."
"They are trying to make up some ground," he said of the Fed's aggressive rate hikes to halt inflation that hasn't seen these levels in four decades. "And as a result, we're seeing the impact to overall issuance."
Additionally, some issuers haven't spent the COVID-19 stimulus funding they received as part of the American Rescue Plan's $350 billion in emergency funding, said Alice Cheng, a municipal credit analyst at Janney Montgomery Scott.
"They can decide whether they're going to market or are they just going to use the funds they have on hand before spending more to go to market," she said. "That drives the supply down."
Moreover, she said, some issuers have found it easier to get bank loans instead of the "disclosure nightmare" of tapping into the market.
And with a recession looming, a lot of the higher-rated issuers with more liquidity on hand may not have to tap into the bond market. "They want to make sure they can have the flexibility to push the projects back at this point," she said.
Taken together, these factors deter or prevent issuers from coming to market, leading them to sit on the sidelines and see where rates land next year, with the general understanding interest rates will not "snap" lower in 2022, Kozlik said.
Many market players have revised their supply projections downward since rising interest rates have slowed refunding and taxable issuance and general market volatility has stopped some issuers from participating.
Kozlik initially predicted issuance would be at $495 billion but lowered it in June to $410 billion and plans to lower it even further in September.
Cheng's initial forecast of $475 billion to $490 billion has been revised with the lower end clocking in around $380 billion to $400 billion. She notes historically, there's an uptick toward the end of the year, so the market could see an increase in issuance during the final quarter of 2022.
"It's not only been a trying year, it's been a volatile year," Kozlik said.
One of the few bright spots, he noted, is new money, believing August's total issuance would have been even lower had it not seen an uptick.
"Unlike what we saw pre-recession where a lot of state and local governments, concerned about their budgets, were laying people off," he said and refunding was a big part of their playbook, now "they are a little more comfortable" with new money sales.
Issuance details
Revenue bond issuance decreased 22.9% to $21.201 billion from $27.495 billion in August 2021, and general obligation bond sale totals dropped 24% to $12.451 billion from $16.390 billion in 2021.
Negotiated deal volume was down 24.9% to $25.990 billion from $34.593 billion a year prior. Competitive sales decreased to $6.644 billion, or 12.8%, from $7.619 billion in 2021.
Deals wrapped by bond insurance dropped 67.8%, with $1.389 billion in 108 deals from $4.306 billion in 174 deals a year prior.
Bank-qualified issuance dropped to $747.8 million in 172 deals from $1.339 billion in 349 deals in 2021, a 44.2% decrease.
In the states, New York claimed the top spot year-to-date.
Issuers in the Big Apple accounted for $35.008 billion, up 4.3% year-over-year. Texas was second with $34.863 billion, down 5%. California was third with $32.435 billion, down 32.9%, followed by Florida in fourth with $11.931 billion, down 7%, and Massachusetts in fifth with $8.667 billion, a 13.2% increase from 2021.
Rounding out the top 10: Colorado with $8.533 billion, down 2.1%; Georgia with $7.785 billion, up 39.1%; Michigan with $7.729 billion, up 6.6%; Virginia at $7.489 billion, up 25.6%; and Illinois with $7.389 billion, down 10.9%.
