Municipal bond issuance rose to $44.665 billion in November, a gain of 53.7% over the same month last year.
November’s sales bring total issuance for the year to $377.672 billion, up from $320.066 billion in the same 11 months in 2018. November’s output slipped from $52.19 billion in October.
The recent supply rise can be attributed to the increased use of taxable bonds due to attractive low rates, high demand from retail buyers, and growing interest from foreign investors.
In November, $11.277 billion of taxables were sold, more than double the $4.218 billion issued the same month in 2018.
“Given the radical changes in the curve and the relationship of tax-exempt to taxable paper, taxable refundings have taken the main stage,” said John Hallacy, The Bond Buyer’s Contributing Editor. “The refunding activity in November soared 261.2% versus the same month last year, primarily on the strength of the taxable refunding activity.”
And 2019 may be looked back on as the year that taxables became mainstream in the muni market.
“A lot of dealers have been educating issuers regarding possible savings in a place that they may not have looked before — taxable munis,” said Richard Taormina, Head of Tax Aware Strategies at JPMorgan Asset Management. “The combination of low Treasury rates and tax-exempt municipals issued in higher rate environments have created a nice situation for issuers to save money. Both large and small are taking advantage of this window.”
Hallacy, former head of research at Merrill Lynch, agreed.
“There appears to be little resistance on the part of the issuers to going taxable,” he said. “They are following the advice of their [municipal advisors] and are seeing these moves as a one-off for savings. I think that participants are viewing issuing taxables as expedient and believe that any long term implications are trifling.”
Tax-exempt issuance also rose, gaining 31.9% to $31.014 billion, from $23.509 billion in the same period last year.
Refunding volume surged 261.2% to $17.215 billion. Issuance of new money bonds rose 9.5% to $23.732 billion from $21.682 billion. Combined refunding and new money bonds rose 42.6% to $3.718 billion from $2.607 billion.
Bonds subject to the alternative minimum tax rose 87.7% to $2.374 billion in November from $1.265 billion in the same month last year.
The number of bonds that were insured rose to 154 in November, totaling $1.966 billion, from 134 issues totaling $2.585 billion last year.
Looking at the sectors, education and transportation issues stood out.
Bonds sold for education rose 76.4% to $11.110 billion in November from $6.298 billion in the same month last year.
“It’s important to remember that the university sector was one of the early adopters of the BABs program when it was initiated, so they are familiar with taxable muni issuance and enjoy the flexibility that taxables offer to their capital plans,” Taormina said.
Transportation volume more than tripled to $10.262 billion in November from $2.799 billion in November 2018.
“Transportation has been demonstrating incredible resiliency with an increase in the month of 267% over last year. Airports have been pursuing their long term plans with a slate of issuance. Highways and toll roads have ramped up issuances where gas taxes and tolls have been increased,” Hallacy said. Public-private partnerships “have been a bit on the quiet side, but, as marginal rates are approaching their limits almost everywhere, P3 remains a viable alternative. One thing is clear even with some of the recent actions by Congress, federal support in the sector will be flat to marginally increased in the near-term.”
There were no standby purchase agreements recorded in November, compared with $524 million made in the same month in 2018.
Issuance in the states overall was also on the rise in 2019.
California came in at No. 1, as issuers in the Golden State sold $54.519 billion so far this year, a rise of 22.1% from the same 11 months in 2019. Texas ranked No. 2, selling $39.880 billion so far this year, a rise of 26.7% from the same period last year.
However, issuers in the tri-state region of the Northeast came under pressure.
Issuers in New York, which ranked third, sold $38.081 billion so far this year, a drop of 2.2% from the same period last year. New Jersey issuers, ranked 10th, sold $9.190 billion, a 10.6% decline from 2018 while Connecticut issuers, ranked 23, sold $5.131 billion so far this year, a drop of 18.8%.
“We saw more issuance earlier in the year in the region. It’s very cyclical, but Connecticut and New Jersey have benefited from a recovering economy and seem more focused on their balance sheets than taking on additional debt at both at the state and local level,” Taormina said. “As more projects arise we feel they will come back to the market. That said, low supply has tightened in credit spreads for all three.”
Conversely, the South rose again. Florida issuers, ranked four, sold $20.233 billion, a gain of 72.1%; Virginia issuers, ranked 12, sold $8.418 billion, a gain of 56.7%; and Louisiana issuers, ranked 35, sold $2.598 billion, an increase of 88.3%.
“Regional differences abound in the results. Louisiana, Florida and Virginia have really accelerated their rate of issuance in order to keep up with population and business growth,” Hallacy said.
And the last month of 2019 looks to finish strongly. In the first week of December alone there are over $17 billion of bonds slated to be sold, the largest volume week of 2019.
“The late Thanksgiving holiday and attractive rates to both issue and refinance should provide an environment for three solid weeks of supply to finish the year,” Taormina said.
“What has been truly remarkable is how easy it has been to efficiently place this sharp uptick in volume,” Hallacy said. “The demand appears to have no bottom.”
