The municipal bond market saw the second highest issuance month ever in October with $65.20 billion, trailing only the $69.83 billion in December of 2017 right before tax law changes that eliminated advanced refundings went into effect.
The market has now digested four consecutive months of issuance greater than $40 billion, with two of those months exceeding $60 billion.
Year-to-date, volume stands at $414.33 billion — meaning that 2020 stands roughly $35 billion of issuance away from breaking 2017’s record annual issuance of $448.61 billion.
“Sixty-billion-dollar months are very, very rare,” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. “I was surprised in 2017 how easily investors absorbed the heavy issuance. That experience is one reason I am not surprised they absorbed the heavy issuance this time around.”
There were 1,612 deals in October, which compares to $55.77 billion in 1,416 transactions in October 2019.
According to Kozlik, the rush of issuance is complete for the year.
“It does not surprise me that issuers worked to get sales done before Election Day,” he said. “Issuers have been rushing for weeks to get their financings completed before the potential uncertainty that could occur just before and after the Nov. 3 elections.”
Strong technical have pushed volume to new heights.
“Deals have seen strong demand, with an average of three to four times oversubscription,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “From an issuer’s perspective, how much lower can rates go? This is probably the best market they will ever see, with low rates, tight spreads and high demand.”
“Two of the four full weeks in November have holidays and the first week of the month is the election, so November is likely going to be the month in 2020 with the least amount of issuance because of that timing and because issuers jammed so much in in the last few months in order to avoid election day,” Kozlik said. Issuance for the week of the election is less than $1 billion.
Kozlik added that he thinks it is more likely the market will see a final tally closer to $450 billion.
“This incidentally was my 2020 issuance forecast,” Kozlik said. “For the rest of the year issuance activity could be rather light.”
Heckman thinks issuance will cool off toward the end of November and into December.
“This pace of volume is not sustainable,” he said. “Some deals might get held until the New Year, when the market should be less crowded.”
Taxable munis were up 50.3% year-over-year to $22.55 billion in October, bring the year-to-date total to $124.28 billion, getting closer to the record $151.88 billion the market saw in the Build America Bonds era in 2010. These totals exclude corporate CUSIPs, which increased in 2020 with more nonprofit hospitals and higher education institutions taking advantage of the taxable demand.
“There is a lot of value in taxable munis and it’s a win-win for issuers, as they get a wider investor base at a relatively cheap cost,” Heckman said. “The sheer volume of taxables is an anomaly but I do think they are here to stay, as they give the issuer another avenue for financing.”
New-money issuance was up 19% to $37.88 billion and refunding volume increased 5.4% to $19.52 billion.
Issuance of revenue bonds was 0.8% lower to $34.25 billion, while general obligation bond sales rose to $30.95 billion from $21.25 billion.
Negotiated deal volume climbed 12.7% to $45.92 billion. Competitive sales jumped 45.1% to $19.23 billion.
Deals wrapped by bond insurance in October were up 32.6% to $4.65 billion in 246 deals from $3.51 billion in 209 transactions the same month last year.
Three sectors were in the green year-over-year for the month.
General purpose deals moved higher to $23.10 billion from $10.55 billion, transportation transactions trekked higher to $6.29 billion from $6.13 billion and education deals rose to $18.30 billion from $15.99 billion. The other sectors saw a decline of at least 7.3%.
Six types of issuers increased volume from a year ago, while issuance by the other two declined by 51.9% and 100%. Issuance from state governments rose 77.2% to $5.77 billion from $3.26 billion, cities and towns saw a 44% increase to $10.61 billion from $7.36 billion, counties and parishes’ increased 22.8% to $4.92 billion from $4.00 billion, districts gained 19.7% to $14.79 billion from $12.35 billion and local authorities’ moved higher to $10.67 billion from $9.14 billion.
California continues to lead all states in terms of long-term muni bonds sold so far this year. All issuers in the Golden State have accounted for $62.14 billion. Texas is second with $54.45 billion, New York is third with $45.54 billion, Florida follows in fourth with $18.25 billion and Ohio rounds out the top five with $16.78 billion.
The rest of the top 10 are: Pennsylvania with $15.96 billion, Massachusetts is next with $12.72 billion, followed by Illinois at $11.85 billion, then Virginia with $11.51 billion and Michigan with $10.89 billion.
Kozlik believes that depending upon the election, a “Blue Wave scenario could support a level of issuance that could be $100 billion or higher than 2020” in the new year.
“A non-Blue Wave result would really dampen issuance, especially new-money issuance in 2021,” he said. “Refunding issuance could be high, even higher than in 2020. But new-money issuance could result in overall issuance being closer to levels we saw in 2012 to 2014.”
