March municipal volume plummeted in March. There was just $16.99 billion of issuance spanning 522 deals, a 39.2% decrease from the $27.93 billion in 711 transactions there was in March of 2019.
Municipal bond issuance was at $67.88 billion after the first two months of 2020 and was on pace to easily eclipse the $400 billion mark — then COVID-19 started spreading like wild fire and completely turned the market upside down.
The pandemic effects caused municipal benchmark yields to skyrocket and municipal to taxable ratios go through the roof. There was essentially no primary market over the course of two weeks in March. All of that adds up to the lowest volume in March since 1997, when there was $15.03 billion of issuance. In 1997, the yearly total was only $220 billion, as issuance in the 1980s and 1990s was significantly lower than present day.
Staying in recent history, it would be March’s lowest issuance total since 2011, when there was $18.91 billion and that year, the total issuance was $287.72 billion.
Although the quarter ends on a down note, volume for the first quarter is up 12.7% to $89.50 billion from $79.38 billion.
So how much will this muted month impact yearly volume?
“There could be slower periods and starts of issuance but I expect that the all-out-frozen market is likely behind, especially considering the support the Federal Reserve gave in its QE and other programs,” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. “We will have to see how this develops over coming weeks and months and because of this, I think it is hard to tell whether or not we will get to $400 billion for the year.”
Kozlik said that at the end of February he was confident issuance would have reached $450 billion or even higher for 2020.
“Issuance over the first two months was actually pretty strong relatively speaking,” he said. “Late spring and summer months is typically when issuance activity generally picks up. And with rates moving lower and lower we expected issuance to rocket through the year.”
On March 9, the Refinitiv Municipal Market Data benchmark AAA muni yields were at the lowest levels ever seen, as the 10-year was 0.78% and the 30-year was 1.38%. Then the virus effects and shutdowns of governments across the country ensued and two weeks later on March 23, those same maturities were yielding 2.79% and 3.37%.
In that same timeframe, the muni/taxable ratios went to 369.5% from 153.8% on the 10-year and to 251.5% from 151.6% on the 30-year.
Refunding volume for the month was up 25.3% to $5 billion from $3.99 billion and new-money issuance was down 53.9% to $8.50 billion from $18.44 billion.
Wesly Pate, portfolio manager at Income Research + Management said that going forward, overall issuance on the tax-exempt side will be impacted by the ongoing crisis but largely mitigated and the market will see more of a loss of taxable issuance.
“Most of the exempt issuance going forward will be new money, the caveat will be how long will shelter-in-place demand stay in place across the country,” Pate said. “As long as construction will continue, we think you will see most of exempt issuance materialize.”
Taxable bond volume declined 24.3% to $2.99 billion from $3.96 billion. Before the COVID19 pandemic, the majority of taxable deals that have been coming are being used as a refunding or advance refunding of tax-exempt debt.
“Coming into the year, we were anticipating upwards of $100 million of taxable volume, given where ratios and spreads are right now after everything that has happened, that is going to push a lot of refunding out the window,” Pate said. “Going into the year, a 50 basis point increase in rates, could wipe out of 30% of taxable issuance and right now, yields are higher for taxable issuance, and those deals are no longer an efficient use of capital.”
Issuance of revenue bonds was 33.5% lower to $8.05 billion, while general obligation bond sales fell to $8.93 billion from $15.82 billion.
Negotiated deal volume was down 31.6% to $12.27 billion. Competitive sales decreased 50.2% to $4.20 billion.
Deals wrapped by bond insurance in March decreased 8.9% to $1 billion in 85 deals from $1.11 billion in 101 transactions the same month last year.
Only one sector was in the green in February and that was utilities as it increased 123% to $2.11 billion from $945 million. All the other sectors saw a decline of at least 6.7%.
Only one type of issuer increased levels from a year ago, while issuance by the rest of the sectors declined at least 21%. Issuance from Colleges and universities rose 33.2% to $957 million from $718 million.
Texas remained 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 $11.90 billion. California is second with $11.06 billion, New York is third with $9.98 billion, Ohio is fourth with $9.15 billion and Pennsylvania rounds out the top five with $3.57 billion.
Pate added that opening will occur even more, as it has already started.
“We are still at sub 3% yields in most areas, that is great value,” Pate said. “The big question is as long as the market from a credit basis, performs as it has in the past, flows should come back in the foreseeable future, as our asset class still has an extremely low default rate. In our base case we will not see a massive wave of defaults and investors will return to asset class as municipalities are in better shape than they have been in the past and they should hold up.”
Pate noted that everything been put in place to keep local borrowing and Fed is supporting the market unlike they never have in the past, so there is a safety net now, which can only help moving forward.
“The help package from the stimulus and Fed is going to make more than just a small splash. When the last time we saw this level of agreement in a stimulus package?” Pate said. “What you’re seeing from Washington is that depending on how long this plays out for, the longer it continues, there would be more help coming.”
So what should be expected of issuance in April?
“There is a pent-up need to get financings executed and there is demand,” Kozlik said. “April might be strong than later months. Often multi-month preparations are needed for financings and the working from home status may not be conducive to that dynamic.”
Pate said that uncertainty will continue to weigh on issuance at least through April, too early of a time frame to see issuance come back to market and to make up for what we have seen.
“But at the same time we aren’t talking about interest rates through the roof and although munis have not performed like a safe haven asset class, but if you believe about the historical facts and fundamentals about how we are a safe haven, then this is absolutely a buying opportunity,” Pate said.
Kozlik continued to say that he doesn’t recall a non-financial catalyst that has affected the muni market and volume ever in his lifetime, at least not to the degree that we saw in March.
“I was working in New York City as a banker on Sept. 11 and I was pricing a deal that day, so was in the office early, the pricing was shelved by the late morning,” he said. Several colleagues stayed at his apartment that day because they could not get home and Manhattan was shut down.
“I remember for days, maybe weeks U.S. fighter jets circling the city,” he said. “There was an electrical blackout in NYC in 2003 that lasted a day or two but there was no meaningful slowdown in municipal issuance.”
Kozlik said that post-9/11 there were many remote locations that were enabled as a result of the consequences of what happened that day.
“This time, almost everyone is working from home. So, it will be interesting to see what the 'normal' is when this passes,” he said. “I also think that going through events like this helps bring people together, there are bonds that can be forged when folks (or the industry) faces adversity together.”
Pate also noted that it’s not going to be cost of issuance, but willingness to issue long-term debt at least in the near-term future for issuers.
“Some large issuers will come to market and get done at reasonable levels. They will drive it and set off a snowball effect, for other issuers to follow,” Pate said. “The buyer base is still present, issuance will drive incrementally, and we just need a couple of first movers to get the ball rolling" before a return to a normal market.
