June municipal bond issuance plummeted 46% year-over-year, led by a steep drop in taxable and refunding volumes as issuers sat on the sidelines amid the Federal Reserve's 75 basis-point rate hike.
Total issuance for the first half of the year is down 15% from 2022, likely leading to 2022 falling short of 2021’s and 2020’s
For the first half of 2022, total issuance sits at $201.556 billion, down 14.5% from $235.836 billion in 2021. Taxables are down 46.8% to $31.024 billion from $58.338 billion.
Total June volume was $26.979 billion in 730 deals versus $50.371 billion in 1,372 issues a year earlier, according to Refinitiv data. Taxable issuance totaled $1.609 billion in 77 issues, down 86.6% from $12.024 billion in 236 issues a year ago. Tax-exempt issuance was down 29.4% to $24.823 billion in 646 issues from $35.153 billion in 1,117 issues in 2021.
Reversing course from previous months, new-money issuance was down 33% to $23.087 billion in 668 transactions from $34.460 billion a year prior.
Refunding volume decreased 81.5% to $1.920 billion from $10.375 billion in 2021 and alternative-minimum tax issuance dropped to $548.2 million, down 82.8% from $3.195 billion.
June is typically a heavier supply month, and this year's nearly $27 billion figure is low compared to historical standards. The last time June’s total issuance was less than $30 billion was in 2013 with $26.111 billion.
Throughout the month, issuance was choppy on a week-to-week basis, with some weeks seeing issuance under $3 billion. The volatility caused several issuers, such as
“Everyone is being exceptionally careful to not make any missteps. It’s only a half year, and we've got six months, but it's a deep hole to come out of," said Barclays strategist Clare Pickering. "And you’ve got a rate environment that's extremely unpredictable right now.” .
May’s hotter-than-expected inflation report in the middle of June prompted the Federal Reserve to implement a 75 basis point rate hike at its Federal Open Market Committee meeting instead of the anticipated 50bp prior to the release of the Consumer Price Index report.
The June hike accounted for some of the uncertainty in the marketplace and contributed to the plummeting issuance in June year-over-year.
Issuers have been especially concerned with timing their deals so as to avoid
“Issuers tend to demonstrate pause when there's outside market volatility,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc. “So when you have these runaway inflationary numbers and a very aggressive Federal Reserve tightening sequence that tends to result in issuer pause.”
At the next FOMC meeting in July, the Fed is expected to hike rates either 50 or 75 basis points.
“We won't know, and we can't get inside the black box in the Fed’s actions,” Pickering said, adding that there’s fear of sustained inflation as each indicator is released.
As rising interest rates have slowed down refunding and taxable volumes and general market volatility has kept some issuers on the sidelines, many market participants have
Lipton’s initial forecast of $450 billion to $460 billion has been revised to resemble something closer to $400 billion.
“It’s very obvious and very intuitive that 2022 will not be a record issuance,” he said.
Issuance in 2020 and 2021 was heavily influenced by a wave of taxable supply, which was supply tied to advance refunding of outstanding tax-exempt debt after the Tax Cuts and Job Acts effectively eliminated the ability to market tax-exempt advanced refunding bonds. Then the Build Back Better legislation never came to fruition.
Moreover, “rising interest rates have stifled both new-money and refunding issuance. The market volatility is largely tied to monetary policy uncertainty, as well as unsettling macro and geopolitical concerns," Lipton said. "Taken together, this has kept many issuers on the sidelines … and has effectively resulted in lower issuance.”
Not everyone has revised their predictions.
Going into 2022, Pickering and fellow Barclays strategists Mikhail Foux and Mayer Patel predicted total issuance would be $430 billion to $450 billion, which included $110 billion of taxable bonds with municipal CUSIPs and $25 billion with corporate CUSIPs.
While supply in the first half of the year turned out to be even lower than expected, they haven’t changed their total supply forecast.
Pickering noted the forecast is forward-looking, despite June being a “tough month” and said continued volatility and fears of interest rates rising even higher led issuers to delay issuance to the second half of the year.
“You might not price it today if you get indications that it's better tomorrow, but you still getting your project financed this year at a lower attractive rate than potentially next year or later in this year,” she said.
They did note, though, that total issuance will be on the low end of their projections.
However, since the first half of the year has seen less taxable issuance, they have adjusted their total issuance forecast for taxable bonds with municipal CUSIPs to $75 billion while keeping the supply of corporate CUSIPs at $25 billion.
“In a nutshell, we expect a larger share of tax-exempt supply, driven mostly by new money, than we expected going into this year,” they said.
Typically, issuance is higher in the second half of the year than the first half, and they believe that “will be the case again as the muni market starts to stabilize in 2H22.”
Additionally, “municipalities will likely be under pressure to place deals because of uncertainties related to inflation and a possible recession, despite higher rates,” while “COVID funds will soon run out, and additional federal help seems unlikely any time soon,” they said.
They believe “most of the damage to muni yields has been already been done, and even if rates do not decline, they should at least stabilize.” Further, they expect less volatility, and the primary market should function more efficiently in the coming months.
Issuance details:
Issuance of revenue bonds decreased 55.3% to $14.930 billion from $33.374 billion in June 2021, and general obligation bond sale totals dropped 29.1% to $12.050 billion from $16.997 billion in 2021.
Negotiated deal volume was down 49.1% to $18.542 billion from $36.436 billion a year prior. Competitive sales decreased to $7.771 billion, or 30.4%, from $11.163 billion in 2021.
Deals wrapped by bond insurance dropped 44.0%, with $2.013 billion in 126 deals from $3.596 billion in 223 deals a year prior.
Bank-qualified issuance dropped to $775.1 million in 198 deals from $1.363 billion in 351 deals in 2021, a 43.1% decrease.
In the states, California claimed the top spot.
Issuers in the Golden State accounted for $25.692 billion, down 32.4% year-over-year. New York was second with $23.974 billion, down 1.8%. Texas was third with $22.835 billion, down 12.6%, followed by Florida in fourth with $8.312 billion, down 1.2%, and Virginia in fifth with $7.147 billion, a 67.2% increase from 2021.
The rest of the top 10 are: Michigan with $6.892 billion, up 39.2%; Illinois with $6.228 billion, up 1.9%; Pennsylvania with $5.416 billion, down 46.2%; Louisiana at $5.293 billion, up 93.8%; and Wisconsin with $5.093 billion, up 6.8%.
