After improving to the highest level this year, May municipal bond volume was stuck 22% below the year-earlier total and was the lowest for any May since 2014.
The total monthly volume of $27.46 billion spanned 995 transactions, down from $35.19 billion in 1,146 deals in May last year, according to data from Refinitiv.
With one month left to go in the second quarter, the market is still down 19.1% from where it was after the second quarter of 2018. With two thirds of the quarter complete, volume stands at $53.97 billion, in 2018 the second quarter ended with $66.71 billion, meaning volume is likely to catch up with last year's second-quarter performance.
The amount of issuance in May "is a sign of what is to come, in that issuance is likely to continue to lag previous years,” Tom Kozlik, director and head of municipal strategy and credit at Hilltop Securities Inc. said. “Issuance is likely to rise slightly relative to the beginning of the year. We could see a month or two close to or over $30 billion, but we will not likely see monthly issuance come close to the $35 to $40 billion a month levels, at least not on a consistent basis.”
Kozlik said he expected May issuance to provide a clue of the type of summer bump that could be in store for the market.
“Typically the summer months are consistently higher than the beginning of the year and that should continue,” Kozlik said. “Around now is the time of year when plans to issue, some of which were set in motion at the end of last year and the beginning of this year, are coming to fruition.”
Although supply increased in the past month, issuers haven’t yet taken full advantage of market conditions and low rates, according to Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.
“This is now a great time to come for issuers, lots of turbulence, with the global economy and trade war issues, its equating to lots of demand for munis and the asset class in general has been on a huge rally,” Heckman said.
He added that May volume was a little bit better than he thought it would be, but that expectations were minimal.
“Everyone would welcome an uptick in issuance," he said. "It would be healthy for the market. It is a given, that at least this year, supply will not outstrip demand.”
Refunding volume for the month fell 31.2% to $4.42 billion in 188 deals, from $6.42 billion in 187 deals a year earlier. New-money volume dropped 17.9% to $21.01 billion.
Combined new-money and refunding issuance was 35.8% lower from May 2018 to $2.03 billion, while issuance of revenue bonds fell 34% to $14.31 billion and general obligation bond sales dipped 2.5% to $13.14 billion.
Negotiated deal volume sank by 23.3% to $18.19 billion, while competitive sales dove 6% to $9.13 billion.
Taxable bond volume declined 17% to $2.76 billion, while tax-exempt issuance fell 20.3% to $23.57 billion. Issuance of bonds with interest subject to the Alternative Minimum was 50.4% lower to $1.13 billion.
Variable-rate short put debt fell 34.1% to $735 million from $1.11 billion and variable-rate long/no puts declined 1.5% to $1.17 billion.
Deals wrapped by bond insurance for the month crashed down 40.4% to $1.54 billion in 166 deals from $2.59 billion in 146 transactions the same month last year.
Only two sectors gained from year-earlier levels, while issuance by the rest of the sectors declined at least 7%. Utility muni sales increased 23.7% to $3.23 billion from $2.61 billion and environmental facilities deals jumped to $203 million from $40.5 million.
Three types of issuers increased volume in May, while the rest suffered decreases of at least 10%. Issuance from counties and parishes rose 7.1% to $2.29 billion from $2.14 billion, district issuance increased to $7.05 billion from $6.58 billion and direct issuer issuance increased 19.3% to $884 million.
California continued to lead all states in terms of muni bond issuance. Issuers in the Golden State have sold $21.56 billion of municipal bonds so far this year; Texas stayed in the second spot with $13.69 billion; New York kept third with $12.85 billion; Florida was next with $7.24 billion; and Pennsylvania rounded out the top five with $5.37 billion.
Massachusetts was next with $5.25 billion, followed by Illinois with $4.01 billion, Wisconsin with $3.75 billion, then Michigan with $3.62 billion and finishing the top ten is Ohio with $3.50 billion.
Heckman said if Treasury yields keep dropping, munis will follow, possibly extending the rally.
“With all the equity volatility going on, there are more and more inquiries about munis,” Heckman said. “Munis have been getting more press lately and investors who might have had minimal munis in their portfolio, they are now wanting more.”
