Municipal bond supply projections for 2024 so far are at a high of $450 billion and a low of $330 billion, with most firms anticipating issuance next year will surpass 2023's lackluster total.
While most firms forecast issuance to rise year-over-year, the figures they present are less than the
The predictions presented by firms for next year feature a tighter range than the figures for 2023. For this year,
Year-to-date, issuance stands at $353.619 billion and given the Federal Open Market Committee meeting this month and the upcoming holidays, volume is expected to be lighter for the remainder of this year after
As such, issuance in 2023 is unlikely to surpass the $390.715 billion seen in 2022.
The 2024 forecasts are based on various factors, including municipalities running out of pandemic-era federal aid; pent-up demand and a backlog of projects; recession fears; Federal Reserve monetary policy and the 2024 elections.
On the high end is Municipal Market Analytics Inc., which expects $425 billion to $450 billion and Wells Fargo at $425 billion. Those with lower forecasts include HilltopSecurities, which sees issuance coming in at $330 billion while Ramirez & Co. expects $375 billion.
Due to "stronger relative performance of new-money and tax-exempt sales … despite still-elevated yields and, if anything, weaker institutional demand [in 2023] and a reasonable modest improvement in refunding and taxable issuance economics," 2024 will see issuance rise to between $425 billion and $450 billion, said Matt Fabian, a partner at MMA.
Vikram Rai, head of municipals market strategy at Wells Fargo, forecasts $425 billion in 2024, but the figure could surprise to the upside to $450 billion.
Several factors contributed to this predicted increase in supply for next year, for one there is pent-up demand for issuers to borrow after sitting on the sidelines for the past two years waiting for interest rates to come down, Rai said.
With state and local governments holding back "for most months this year to avoid issuing in volatile markets," he expects that "delayed calendar to spill into the next year as they could come to the market to finance delayed projects."
Additionally, there are recession fears, he noted.
"With slowing growth and worries about a looming recession, issuers feel less comfortable about spending down their cash reserves," he said.
And despite rate markets possibly remaining somewhat volatile, Rai said "the rates-will-stay-higher for longer theme has been re-affirmed and more issuers have given up on waiting for lower rates before funding their capital projects."
Lastly, next year is an election year, which includes the presidential, congressional, gubernatorial and state legislative elections, along with "numerous citizen initiatives, mayoral races, and a variety of other local offices on the ballot," Rai said.
Historically, he noted "issuance has increased in election years as many issuers want to get in front of any disruptions or policy volatility that may emanate from these elections."
For 2024, Barclays PLC strategists Mikhail Foux, Clare Pickering and Mayur Patel expect issuance to rise around 10% year-over-year to $400 billion to $420 billion.
Barclays also notes that issuers who have been "sitting on the sidelines waiting for lower rates might have to finally seek funding," while some of the unused COVID funds municipalities relied on may have started to run out, they said.
"The U.S. economy has started to slow down and there is some notable pressure on state and local tax revenues," they said.
New money will be up 12%, but "the
They expect refundings to be up nearly 7%. And with the Fed nearing the end of its hiking cycle, the trend of rates moving lower next year may lead to a pickup in refunding activity, Barclays strategists said.
While issuance is usually "back-loaded," issuers usually stay "away from the primary market during important elections," they said.
Due to this, Barclays strategists expect "issuance to be heavier than normal in the first half, possibly starting early, as several municipalities are shelving their deals" until January 2024.
Alice Cheng, a municipal credit analyst at Janney Montgomery Scott, expects issuance to rise to $385 billion to $405 billion in 2024, up slightly from 2023.
Most of the issuance will be new money, with less refunding activity, she said.
With the interest rate set to come down next year, she said issuers will "go to work" and prioritize what projects, some of which are voter-approved, need to be completed first.
Furthermore, since "rates are not going to come down meaningfully compared to the almost zero interest rate environment" that existed in 2021, market participants "need to readjust that," she said.
And with most of the federal stimulus money set to be exhausted by the end of 2024, issuers may look to the capital markets to finance their projects, Cheng added.
She expects the first half of the year will see a smaller uptick in supply but with the possibility of the Fed cutting rates beginning in March, issuance should pick up thereafter. The last quarter of 2024 will see the strongest growth, she noted.
BofA Securities strategists predict issuance will land at $400 billion.
Heading into next year, there is "optimism that the Fed will cut rates multiple times and continue into 2025," they said.
However, there are still several unknowns, such as when the Fed will start, how much it will cut and how fast it will cut, they said.
"Such a shift from tightening to easing in 2024 should induce a pretty good muni market rally that would extend throughout the year," BofA strategists said.
They also "expect the economy will avoid a recession and produce 1% GDP growth," while the CPI index will get to 3.1%, "only a small improvement from the most recent levels."
Of the $400 billion estimate, they expect $300 billion to be new-money and $100 billion of refundings.
"New-money issuance will likely pick up some once the market rally brings yields down, and the demand side shows more enthusiasm," they said.
Refunding volumes are likely to remain "somewhat low" in the first half of the year, but they will rise in the second half.
Pat Luby, head of municipal strategy at CreditSights, also forecasts issuance at $400 billion.
He based his estimate mostly due to an increase in new-money borrowing. There will be a slight increase in both refundings and new-money and refundings combined. He estimates taxables to be at $40 billion.
"Certainly, the need for infrastructure finance is not going down," Luby said. "The inflationary environment is making capital improvements more expensive, and a tighter budgeting environment will push issuers to prefer capitalizing their investment needs rather than paying as they go."
There are some big projects on tap, including issuance from the Metropolitan Transportation Authority
Jeff Lipton, managing director of credit research at Oppenheimer, predicts issuance will be between $390 billion and $400 billion, around 12% up from 2023.
He also anticipates higher new-money issuance and refunding activity, the latter of which will largely be driven by "the level of interest rate declines," he said.
Lipton pointed out the implications of an election year, and noting "events and circumstances could alter issuance dynamics, although we are not anticipating any new impactful fiscal policies ahead of next November."
Taxable muni issuance, as a percentage of total volume next year, could see double digits," he said, though that is also rate dependent. Taxable issuance is currently at $35.484 billion and is 10% percent of the total volume year-to-date.
On the lower end of the spectrum, Peter Block, managing director at Ramirez & Co, said the "higher-for-longer rates should continue to depress muni market gross supply in 2024."
As such, he expects to see $375 billion of long-term issuance, up about 7% year-over-year. This increase, he said, will mostly be driven by incrementally higher new-money tax-exempt bonds, which should be up around 10% year-over-year to $305 billion. The new-money is needed "to fund a growing backlog of projects for issuers that come to market for capital needs regardless of interest rate levels," he said.
Taxables are anticipated to be at $30 billion, down only 3%, according to Block. He expects taxables will be around 8% of the total market, mostly to fund new-money needs, as "advance refunding with taxable simply do not work at these levels."
Current refunding volume with tax-exempts should be flat year-over-year at around $49 billion, despite there being around $550 billion and growing "eligible or to-be-eligible current refunding candidates," he said.
However, Block notes the primary risk to his forecast is the Fed, whether it cuts or raises rates earlier than the market currently expects.
Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities, estimates issuance at $330 billion due to "the sector's (mostly) conservative budgeting philosophy, declining U.S. economic growth, and prohibitively elevated interest rates."
With economic growth being lower in 2024 compared to 2023, he said "this will again pressure new-money issuance."
Since "state and local government credit quality remains very strong and housing prices appreciated compared to pre-pandemic levels," new-money issuance will only fall slightly to $280 billion, he said.
Interest rates are "likely to remain prohibitively high," which will cause refunding issuance to fall to $50 billion.
Monthly issuance is estimated to average around $27.5 billion in 2024, down from the nearly $30 billion average expected in 2023, Kozlik said.
For issuance to be $400 billion, he said the monthly average would need to be around $33.3 billion.
Looking further out, MMA's Fabian said during 2024 and beyond, "the rising cost of climate change adaptation and related economic transition, the maintenance and replacement burden of existing physical infrastructure, and the depletion of pandemic-era federal aid should begin to push new-money and tax-exempt issuance higher, with an annual $400 billion or more an approachable goal in the medium term," he said.
And in the longer term, the challenges that issuers face should push annual new-money issuance of more than $500 billion.
"Climate change adaptation is a massive cost for the states which will tap the municipal bond market accordingly," he said.
"Even assuming no return of the tax-exempt advance refunding, municipals' regular $100-plus billion annual refunding pace should be re-attainable once yields moderate or once higher yielding current issues become callable," he added.
