Municipal bond supply projections for 2022 are beginning to roll in, with a high of $550 billion to a low of $390 billion, but a majority of the firms reporting anticipate less issuance in 2022 than the $484 billion record hit in 2020.
The figures reported so far are mostly bearish, with some bullish projections, predicated on various factors, such as the new infrastructure law, interest rate expectations and monetary policy, global economic recovery and future tax policy, leading to a broad range of forecasts.
Issuance in 2021 is unlikely to break 2020’s record. Bond volume ticked up earlier in November — $32.784 billion so far in the month and the total sits at $427.469 billion for the year — after a lackluster August to October. But how policies from Washington shake out and the path of overall economic activity in a still-recovering global economy with COVID-related overhang makes predicting volume in 2022 more difficult.
“Projecting municipal supply is never a straightforward process, but the 2022 issuance forecast poses an additional challenge given there are still a number of uncertainties with respect to what may be included in the final version of the Build Back Better Act,” Barclays strategists said in a report.
The current Build Back Better bill
Some supply predictions include scenarios where tax-exempt advance refundings and direct-pay bonds come to fruition, but firms are making clear they do not expect that to happen as the Senate debates the $1.7 trillion package that has little room for more expenditures.
Some strategists say the
On the high end, BofA Global Research expects $550 billion and HilltopSecurities $495 billion. Barclays sees issuance in a $430 billion to $450 billion range and Morgan Stanley has a bullish view of $420 billion and bearish at $390 billion.
BofA strategists say their 2022 target includes $370 billion of new-money issuance and $180 billion of refunding and assumes the exclusion of advance refunding in the reconciliation bill; if reinstated, they would offer a large upward revision.
“New-money growth has been very strong for the past five years, reflecting GDP, population and inflation growth,” BofA strategists Yingchen Li and Ian Rogow said in the report.
Except for 2020’s 4% growth over 2019, they noted, the other four years all had 10%-plus growth year-over-year.
“Our $370 billion new-money estimate for 2022 is 17% higher than 2021, and is based on strengthened financial positions for state and local governments after outsized federal aid, which should allow them to undertake even more infrastructure projections,” the report said. “Additionally, high inflation, which is not expected to disappear any time soon, should demand higher dollar values of all infrastructure efforts.”
Refunding volume in 2021 has been “disappointing,” the authors say. Their target was $185 billion, but at this point, it seems it will end the year at around $160 billion.
“Our $180 billion 2022 refunding estimate is based on a resurgence of taxable advance refundings as well as a larger pool of currently refundable bonds in 2022,” noting $80 billion will be taxable advance refundings and $100 billion will be other forms of refunding, BofA said.
HilltopSecurities expects an 8% increase to $495 billion in 2022 because federal government funding, in aggregate, “is going to support, not stymie municipal bond issuance in 2022 and even thereafter.”
“The aid is boosting credit quality overall and that will help leaders in multi-year planning,” said Tom Kozlik, head of strategy and credit at HilltopSecurities. "This relationship is an important driving factor and contrasts significantly with state and local governments’ positions in the wake of the Great Recession and especially from 2011 to 2014.”
State and local governments during that time were struggling to repair their balance sheets after the Great Recession. That concern was a key reason why new-money issuance was so low from 2011 to 2015.
"Public entities were looking for opportunities to cut overall spending, and they were not in a position to add to expenditure totals," Kozlik said.
The dynamic is very different this time around.
"In 2020, downgrades briefly outpaced upgrades but the pendulum quickly swung in the favor of municipal entities mostly as a result of federal aid," Kozlik said. "Upgrades have outnumbered downgrades over the first three quarters of 2021, and we expect this trend to continue in 2022 by a healthy margin."
Most significantly, Kozlik said, the results from federal activities will carry over in the form of “an outsized rate of U.S. economic growth and positively impact municipal bond market issuance next year.”
Samuel A. Ramirez & Co. anticipates $476 billion, a 3.9% increase year-over-year. "Our projection assumes no new muni provisions in the BBB and that federal funds for state-federal infrastructure programs are in place (earliest) by late 2022," a report said.
The overall supply increase is driven by a 6.6% year-over-year increase in exempts, which offsets a 3.3% decline in taxables. The gross supply number is buoyed by a 17.4% increase in current refundings due to the significantly higher issuance in 2012 (bonds with 10-year par calls) versus 2011, the report said.
"New-money is expected to dip slightly by 1.4%. If anything, new money will be impacted by the infrastructure bill and we will revise accordingly if so," the report said.
Municipal Market Analytics anticipates between $450 billion and $475 billion in 2022 as it’s likely governments "will borrow a bit more to enhance or extend projects being funded with federal grants," MMA partner Matt Fabian said.
"That’s a healthy process, since Washington and state capitals are going to require an unusual amount of control over what local governments do with their federal cash," Fabian said. "In turn locals may look to the bond market to achieve the funding on their own, adjacent infrastructure goals."
JPMorgan projects $470 billion of supply with $358 billion of tax-exempt debt, about 6% above 2021, $112 billion of taxable bonds, which would be 10% below the $125 billion of taxable supply in 2021. For tax-exempts, JPMorgan expects $256 billion of new-money and $102 billion of refundings.
"The increase in new money is attributed to a confluence of new funding for infrastructure, including traditional projects like water and sewer, bridge and tunnel, as well as broadband development," the report said.
JPMorgan estimates taxable advance refundings will drop to about $40 billion in 2022, due to a combination of lesser-viable tax-exempt candidates and higher UST rates.
Barclays strategists see a significantly smaller new-money figure. They are less bullish about issuers adding debt as a result of the infrastructure package.
They expect supply to decline 2.2% year-over-year to between $430 billion and $450 billion, with $260 billion of new-money, $180 billion of refundings and $110 billion of taxables, not accounting for $25 billion of corporate CUSIPs. Mikhail Foux, Clare Pickering and Mayur Patel note, if advanced refundings and a direct-pay bond program is resurrected — though they do not expect them to be — issuance could surpass $500 billion.
“New-money supply will likely decrease somewhat, as municipalities have and will be receiving more federal money and there were fewer new bond deals approved on the ballots this year; although to partially offset that we should see more private-activity bonds,” they said.
Barclays notes while new-money issuance will remain elevated, it will decrease relative to 2021.
They see three main factors to back this up: Fewer new bond deals approved on the ballots compared to previous years — the second-lowest in the past decade — which typically is a precursor of a slower new-money supply in the succeeding year.
From Barclays' perspective, the federal aid that was directed to municipalities has yet to be spent. “These excess funds may reduce the borrowing needs for some issuers,” they said.
They think the new infrastructure package will address some of these funding needs but more private-activity bonds being issued in 2020 offset the loss of new-money.
“Refundings, especially taxable refundings, should increase, if rates remain in check.”
The first quarter of 2022 is likely to be heavier in taxable issuance, Barclays and others have noted.
“In early September, a host of tax-related proposals for the reconciliation process were unveiled, with tax-exempt advance refundings making the initial list,” the Barclays strategists wrote. “In our view, many issuers took a wait-and-see approach toward their taxable advance refundings, which has decreased supply in the fall so far. Since we saw a pickup in advance refunding taxable issuance in 2019, taxable supply in September-November has accounted for 40% of annual taxable supply, whereas this year it is lower at 25%.
“These refundings will be pushed into next year. In addition, we expect about $25 billion in taxable bonds with corporate CUSIPs, similar to this year's number (currently at $22 billion) and still sizable compared with recent history.”
Barclays also forecasts a measured increase in green bond issuance next year to a range of $20 billion to $25 billion, which would represent a 10% to 15% increase in supply.
“We would have expected more next year, if not for the $1.2 trillion infrastructure package ... and the Build Back Better Act, which is waiting in the wings — both include a number of environmental provisions that might lower municipal desire to issue bonds for environmental projects,” they said.
UBS Financial Services envisions overall municipal issuance will total $440 billion to $445 billion, down from an estimate of $465 billion to $470 billion for 2021.
"Our estimates for some modest supply contraction is driven by three main factors. First, we expect less new-money supply. State and local government balance sheets are relatively robust, easing their need to issue debt," Managing Director and Chief Investment Office Head of Americas Fixed Income Tom McLoughlin and Executive Director and Senior Municipal Bond Strategist Kathleen McNamara said in a report. "Second, ballot proposals were light in the November 2021 election. And third, the pace of taxable advance refundings is apt to slow reflecting higher rates as well as a smaller universe of tax-exempt candidates."
UBS also joins the firms that said their outlook for supply would move higher by a "meaningful amount" if Build Back Better included the reinvestment of tax-exempt advance refundings and revival of a taxable municipal bond program.
Jeff Lipton, managing director, head of municipal credit and market strategy, at Oppenheimer & Co. Inc. projects between $450 billion to $460 billion. Lipton said the infrastructure package "can be expected to buoy muni issuance to some extent next year and beyond as state and local issuers seek to leverage off of federal support."
"We would also posture that expectations for still-historically attractive interest rates should provide fertile ground for the issuer community," Lipton said. "In our view, the supply dynamic for next year will be considered along with heavy demand needs, which should help to promote muni performance."
On the lower end, Morgan Stanley strategists predict $420 billion of gross supply, 12% less year-over-year, with $300 billion of new money (-11%), $120 billion of refundings (-15%) and $20 billion of tax-exempt net supply.
Morgan Stanley’s bull case sees gross supply climbing as high as $445 billion based on lower-than-expected interest rates and increased new-money issuance as a result of federal spending. Their bear case puts issuance at $390 billion on rising yields and dampened new-money supply as a result of federal spending.
Their base case model forecasts an 11% decrease in new-money supply driven by low 2020 GDP and high 2021 government revenue. The implication here, they said, is that municipalities’ capital ambitions “may be tempered by cognizance of the recent downturn and, concurrently, they may be more comfortable funding those ambitions on a pay-as-you-go basis rather than adding to balance sheet leverage given strong recent tax receipts.”
“Decreased new-money issuance may seem counterintuitive given increased federal infrastructure spending, but historically this hasn’t reliably boosted muni borrowing,” they said.
“Even if this federal commitment of $550 billion of new infrastructure spending were to spur municipalities to spend more than they otherwise would have, it is possible they do so more by harvesting increased tax receipts than issuing new debt,” they said.
Morgan Stanley's study of states’ responses to federal highway grants from 2000 to 2015 showed correlations of grants to issuance were significant, "regardless of whether they were analyzed as coincident or lagged relationships."
"Relationships remained insignificant even when tested under various definitions of capital grants. Hence, in lieu of a solid historical link, we defer to our model-defined base case,” the report said.
