November municipal bond issuance rose 58.3% year-over-year as fears over rising rates drove issuers into the market but the total $33.8 billion figure is average over a 10-year period. With total volume down 4% through 11 months of 2021, issuance is unlikely to break 2020's record.
Total November volume was $33.818 billion in 896 deals versus $21.359 billion in 895 issues a year earlier.
New-money issuance was up 61.2% to $20.604 billion in 585 transactions from $12.785 billion a year prior and refunding volume rose 29.9% to $8.101 billion from $6.235 billion in 2020.
“What really drove it was the big fear around rates going higher, so this is going to be their opportunity to raise funds, and frankly, it becomes more challenging once you get toward the end of the year,” Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management, said.
The influx of issuance in November also partly stemmed from some municipalities holding back in August through October as they waited to see what tax policies and spending packages might emerge from Washington, but the dramatic jump in issuance this year is also because last November’s totals were stymied by the massive $50 billion-plus October figure.
“The large year-over-year change in November was more about last year’s issuance patterns and less about the legislative developments this year. Last year, October’s issuance was the highest month on record, which seemed to be driven by not just the low rates but getting into the market to avoid potential volatility from the election,” said Erin Ortiz, managing director of municipal research at Janney Montgomery Scott LLC.
“This year, some issuers may have waited on the developments in Washington because of the momentum around bringing back [tax-exempt] advance refundings and a revival of a [Build America Bonds]-like subsidy program," she said.
The Infrastructure Investment and Jobs Act and the current Build Back Better bill
"With the president signing the bipartisan infrastructure bill into law in mid-November and the House passing Build Back Better without any of the major muni priorities that provides some more certainty for those where that was a major factor in their decision tree," Ortiz said.
Tax-exempt issuance was up 58.2% to $24.502 billion in 742 issues from $15.489 billion in 705 issues in 2021. Taxable issuance totaled $7.955 billion in 146 issues, up 54.5% from $5.149 billion in 182 issues a year ago. Alternative minimum tax insurance dropped to $1.361 billion, down 88.6% from $721.7 million.
Total issuance so far this year is at $431.667 billion, down 4% from $449.828 billion through the end of November 2020.
Many analysts predict total issuance will fall short of last year’s $484-billion-plus record as December’s volume, which while it could surprise to the upside with some large deals scheduled, the holiday-shortened weeks means the total for the month is unlikely to be large enough and may even be down from November, said Pat Luby, senior municipal strategist at CreditSights.
“December will be a more active issuance month than usual, which has to do with the combination of expectation that rates will continue to drift higher along with more clarity with [Infrastructure Investment and Jobs Act],” Ortiz said. “While it’s looking unlikely that 2021 issuance will set a new record, it’s still shaping up to be the second-highest year. Still pretty remarkable.”
Total taxable volume so far in 2021 is $106.457 billion in 2,177 issues. Taxable volume through the end of November 2020 was $137.412.
Going into December and 2022, taxable issuance should continue, accounting for roughly 20% of the total, assuming there will not be a reinstatement of tax-exempt advance refundings, Ortiz said. Although rising, rates for the U.S. Treasury and muni market are likely to remain low from a historical perspective. This may facilitate taxable advance refundings as taxable bonds remain a viable option for issuers looking for more flexibility, Ortiz and others said.
“That’s still an evolving marketplace. The yield spreads are really attractive; credit quality is tremendous,” Heckman said. “Now, if we get into a different type of environment where the economy slows down, corporate profitability slows, then things might change.”
The Omicron variant particularly could spell trouble for the muni market, especially if there are shutdowns. Heckman said the market is once again sensing an economic slowdown at some point next year.
Overall, Heckman predicts next year will be a decent year for issuance, but he said it is
“2020 was such a unique year and was really off the chart, so we view that as a high watermark, and we're not sure we repeat it,” he said.
Ortiz, who predicts between $475 billion to $490 billion for all muni borrowers — including issuance of municipal-backed corporate CUSIPs — said issuers may have newfound incentives from the federal infrastructure law that will likely necessitate bonded debt to supplement federal grants.
“While there is uncertainty around how quickly borrowers can issue debt under some of the new bond provisions and it is plausible that improved cash positions could hamper borrowing, overall, the robust forecast is predicated on the combination of higher than typical federal funding for infrastructure and improved credit positions of most issuers in a still low interest rate environment,” she said.
Issuance details:
Issuance of revenue bonds increased 100.8% to $19.536 billion from $9.729 million billion in November 2020, and general obligation bond sales rose 22.8% to $14.282 billion from $11.63 billion in 2020.
Negotiated deal volume rose 65.9% to $26.764 billion from $16.131 billion a year prior. Competitive sales also increased to $6.969 billion, or 99.7% from $3.49 billion in 2020.
Deals wrapped by bond insurance in November increased 45% to $2.056 billion in 142 deals from $1.418 billion in 136 deals a year prior.
Bank-qualified issuance dropped to $1.121 billion in 272 deals from $1.331 billion in 327 deals in 2020, a 15.8% decrease.
In the states, California, as usual, led all others so far this year.
Issuers in the Golden State have accounted for $75.195 billion, a 10.3% increase year-over-year. Texas is second with $50.196 billion, down 12.1%, New York is third with $43.029 billion, down 9.3%, Pennsylvania is fourth with $17.4 billion, up 1.7%, and Florida rounds out the top five with $15.304 billion, a 22.9% decrease from 2020.
The rest of the top 10 are: Washington with $11.877 billion, up 26.4%; Illinois with $11.039 billion, down 11.8%; Colorado with $10.866 billion, up 13.3%; Massachusetts at $10.558 billion, down 26.7%; and Ohio with $10.308 billion, a 40.9% decrease from 2020.
Lynne Funk contributed to this story.
