Thanks to the taxable tear, a 117% increase in volume of taxables, the municipal market saw the third highest volume for the month of January in the past 10 years.
Historically the market gets off to a slow start in a new year, but that was not the case this time around. Overall January volume increased 18.1% as it reached $29.62 billion in 702 transactions, versus $25.06 billion in 603 deals in January of 2019, according to data from Refinitiv.
The two instances when the year got off to faster starts were $36.05 billion in 2017, the beginning of the Trump administration, and $32.66 billion in 2010, which began the second year of the Build America Bonds program.
Taxable volume for the month was up 117% year-over-year to $6.56 billion spanning 107 deals, versus $3.03 billion through 58 transactions in January 2019. The market technically saw more than that, but since the data does not include corporate CUSIPs, a large portion of the taxable issuance so far this year, the figure is lower.
Even with the increase of supply, "at this point, I don’t think there is a magnitude of supply that the market should have problems getting digested,“ said Wesly Pate, senior portfolio manager at Income Research + Management. "To say demand is strong is an understatement. The fundamentals look appealing and technicals are still strong. ”
He noted that the demand is not concentrated in just one part of the curve, but evenly across all maturities.
Tom Kozlik, head of municipal strategy and credit at Hilltop Securities, said that Hilltop projects total taxable issuance to come in at roughly $90 billion for the year.
“It is difficult to give a number by month in my mind. But, the $6.3 billion for January is just under what we might expect for an average amount of taxable issuance to reach our estimate, so January 2020 taxable experience does not appear to be far off at all,” he said. “Some are forgetting that January 2020 issuance was above the average amount for a typical January."
Pate said that if we stay where we are with rates, he thinks the taxable trend has a much longer tail and can live on for quite some time.
“There is potential to reach $100 billion in issuance,” he said. “It is a real possibility, especially if rates don’t move higher.”
Pate said that right now the market is welcoming all the taxable issuance.
“Investors in other asset classes want to diversify, especially with insurance companies — they want to get away from corporate credit, which has a much lower average rating than a muni bond,” he said. “They can go down in terms of volatility without giving much up in terms of spread compensation. And often times, they can move up in credit by going with a taxable muni and even pick up a few basis points at the same time.”
He noted that the taxable issuance is likely to continue, due to the deep buyer base and the needs for debt generally continues to grow.
Kozlik noted that expectations were that January issuance was going to be very high, and it seems that final issuance did not meet all expectations. However, it met his.
“It was above the amount we typically see in January,” Kozlik said. “We are expecting issuance to be higher than the monthly average overall, seeing as we forecast a record amount of issuance for 2020 at $450 billion.”
Refunding volume for the month was up 48.5% to $7.49 billion from $5.04 billion. New-money volume increased 12.8% to $19.84 billion. Combined new-money and refunding issuance fell 5.5% to $2.29 billion from $2.42 billion.
“We think that new money is likely to rise in 2020,” Kozlik said. “We published in our 2020 outlook that we expect new money to rise in 2020 partially because we believe the lower rate environment would create some optimism.”
Issuance of bonds with interest subject to the Alternative Minimum Tax dropped down 63.1% to $514 million from $1.39 billion.
Issuance of revenue bonds gained 13.5% to $16.14 billion, while general obligation bond sales increased to $13.49 billion.
Negotiated deal volume was up 27.9% to $21.64 billion. Competitive sales increased 6.7% to $7.46 billion.
Deals wrapped by bond insurance in January increased 57.1% to $1.74 billion in 114 deals from $1.11 billion in 91 transactions the same month last year.
Benchmark muni yields saw two record lows set, both in the last week of the month. First on Jan. 27, the 10-year fell to 1.18% and the 30-year to 1.83% in what were then new record lows. Those records did not last for long, as new records were set on Jan. 30 at 1.15% and 1.80%, respectively. As of publication, those levels were holding.
“A confluence of factors have gathered to begin the new year," including low yields and rates, Kozlik said. “These factors have already morphed into what can accurately be described as a market that clearly favors municipal entities who would like to sell debt.”
If financing is cheap and there is demand on the other side, Pate asked, why wouldn’t issuers look to move accordingly? And while he said that is sound thinking, it is not the same framework municipalities work with, as capital expenses and long-term investment decisions are not made overnight.
“If the need to build the bridge is there, it doesn’t matter if yields dive 50 basis points,” Pate said. “Rates do not drive issuance, other than taxable refundings of course. The need is there, but the willingness is not there. Municipalities continue to look at the federal government, for an infrastructure plan.”
Eight sectors increased volume in January, with healthcare making the biggest jump, to $3.33 billion from $1.58 billion, which of course does not include several billion-dollar-plus corporate CUSIP deals that came in the second half of the month. General purpose issuance increased to $7.57 billion from $6.09 billion and housing volume rose to $1.12 billion from $924 million.
Seven types of issuers increased levels from a year ago, while the one laggard declined 27.6%. Direct issuers rose to $424 million from $64 million, colleges and universities increased to $1.36 billion from $567 million and state agencies issuance was higher to $10.04 billion from $7.54 billion.
Texas leads all states in terms of issuance after the first month of the year. Issuers in the Lone Star State sold $4.48 billion of municipal bonds; New York was in second place with $3.20 billion; Illinois was next with $1.89 billion; Ohio followed with $1.85 billion; and California rounded out the top five with $1.60 billion.
Florida was next with $1.50 billion, followed by Pennsylvania with $1.37 billion, Minnesota with $1.20 billion, then Wisconsin with $1.14 billion and finishing the top 10 is Massachusetts with $1.13 billion.
“The visible supply is up 30% year over year and although February is a shorter month it is slated to be a robust year and month,” Pate said. “We won’t see market pressure as a result of all the supply. We should see really strong year-over-year numbers for the first few months and first half of the year, but then it will slow down as we approach the election.”
