Municipal bond supply projections for 2023 so far are at a high of $500 billion and a low of $302 billion, and firms are split on whether issuance will even surpass 2022's disappointing total issuance.
The figures reported show most firms anticipating less issuance in 2023 than the record levels hit in 2020 and 2021, but potentially more than 2022.
These figures are based on various factors, including market volatility, a potential recession and its severity, and Federal Reserve policy.
Year-to-date, issuance stands at $375 billion and given the Federal Open Market Committee meeting this week and the upcoming holidays, bond volume in December will come in lower than historical standards after November's totals
As such, issuance in 2022
For 2023, on the high end is BofA Global Research, which expects $500 billion and Citi predicts $450 billion to $480 billion. Conversely, Janney Montgomery Scott sees issuance in a $302 billion to $375 billion, while HilltopSecurities estimates $350 billion.
While "2022's issuance was greatly distorted by a very difficult environment, with an ever-elevating Fed hawkishness, rapidly rising interest rates and large outflows from mutual funds," BofA strategists Yingchen Li and Ian Rogow said in a Dec. 2 report. "2023 should be a much friendlier year as the Fed is expected to wrap up its intensive tightening program in the first few months, and eventually begin an easing cycle later in the year."
Investor demand should return as yields are at levels that have rarely been available in the past decade, they said.
"Demand for new financing from muni issuers should look over the great distortion of 2022 and restore its multi-year growth trend that began in 2014," they said.
Of the $500 billion estimate, $380 billion is new money and $120 billion is refunding.
The $380 billion forecast of newmoney issuance in 2023 is an 18% increase year-over-year, which they said "should be reasonable as long as the macro investing environment turns more receptive, which has been the case since November."
On refundings, BofA's $120 billion "estimate reflects a more receptive environment also due to the bull-flattening muni rates view." Despite the large rise of muni and UST rates, current and forward refundings "still make sense for high-grade bonds carrying 4% or higher coupons next year."
Vikram Rai, head of Citi's Municipal Strategy group, forecasts supply between $450 billion and $480 billion, with $310 billion of new-money, while the remaining will be refundings. He expects $375 billion of exempts and taxables at $75 billion.
"Macro uncertainty and a bear-flattening yield curve resulted in underwhelming 2022 issuance," Morgan Stanley strategists said in a Nov. 13 report. "In 2023, these headwinds should subside, but fall short of yielding a record year."
In 2023, they forecast $445 billion in gross supply, up 15% to 20% year-over-year.
New money is projected to be up 19%, driven "by weaker government revenue growth in 2022 and stronger nominal GDP in 2021."
"On the one hand, slower revenue growth — all else equal — encourages borrowing to finance capital projects," they said. "On the other hand, GDP growth in prior years encourages more aggressive and optimistic capital plans, which in turn drives new-money supply with a lag."
Next year, two factors to converge favorably: "Tax collections should slow, encouraging governments to finance a greater share of projects with debt, and several years of strong growth give governments the confidence to borrow."
However, the refunding landscape remains challenged, Morgan Stanley strategists said, with many call options out of the money. They noted a wide bull-bear range for refunding, but the "bull case for rates would re-open the advance refunding market and encourage more current refundings as well."
Matt Fabian, a partner at Municipal Market Analytics, said his firm is predicting issuance will be a little bit higher than 2022,between $435 billion and $450 billion.
He said federal grants would feed new borrowing projects, starting next year but strengthening in the years after that.
Issuers delayed bond issuance in 2022 because of rising rates, so once rates stabilize in 2023, there will be better opportunities, he noted.
"It's an overhang of temporarily delayed projects, it's better borrowing conditions, and it's the beginning of the impact of all the federal assistance that will be bootstrapping projects," Fabian said. "So, you're allowing municipalities to leverage those dollars to borrow more or finance bigger projects."
He said the presumption is a slowdown in rate hikes, but the Fed is still unpredictable. If the Fed decides to raise rates another 200 basis points, issuance will not be as good as it was before.
"The economy and the Fed could dampen supply via renewed government spending austerity (reducing new-money sales) and minimal/worsening refunding opportunities," he said.
Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel expect a total issuance of $400 billion to $420 billion, up 5% year-over-year. This figure does not include their estimates of $10 billion to $15 billion of
This modest increase is "due to elevated rates that will continue hampering refunding activity; a number of municipalities having pre-funded their needs in 2021 and early 2022," mostly depleted COVID funds, which still provide a much-needed cushion to some issuers; and "tax revenues remaining strong for now, despite the US economy likely sliding into a recession."
Muni issuance may also get a boost from "elevated capital spending and labor costs and the effects of the passed infrastructure package," they said.
They believe "issuance will be back-loaded," likely to start slowly but pick up as the year progresses.
Barclays strategists predict refundings will total $75 billion to $80 billion, as "elevated rates and a challenging market environment will likely continue to make most refundings uneconomical, with the exception of current refundings of high-coupon debt."
However, if rates decline in the second half of 2023 because of an economic slowdown, they said "there could be an uptick in refundings and gross supply in general," they noted.
Taxable supply has been significantly lower than last year and is likely to end the year at $70 billion, down more than 50% year-over-year, "driven primarily by slower taxable advance refundings," as the surge in UST yields, coupled with rich ratios, made the economics unattractive," they said.
"To offset some of this loss in taxable municipal issuance, more new-money deals could come to market if rates stabilize and will likely remain the driving force for taxable issuance unless muni yields decline meaningfully," Barclays strategists said.
If rates come down a little in 2023 amid a recession, "there could be some high-coupon tax-exempt deals (particularly with call dates in 2024-25) that could be candidates for taxable advance refundings," they said.
Jeff Lipton, head of municipal research and strategy at Oppenheimer & Co., predicts issuance will be higher next year, forecasting $410 billion of debt in 2022.
Lower levels of volatility next year will prompt issuers who sat on the sidelines in 2022 to return to access the market in 2023.
However, a recession, which many strategists are forecasting to happen at some point next year, could derail issuers' desire to come to market.
"If it's deeper and more protracted that can keep issuers on the sidelines as well," he said of a recession, which could possibly happen midway through 2023.
UBS sees overall municipal issuance for calendar year 2023 remaining subdued, totaling $395 billion to $405 billion.
"Our estimate for flat to modest supply expansion is based on the prospect for a slight uptick in new money issuances rather than refundings," UBS strategists said in a Dec. 2 report.
They expect refundings to "remain low reflecting the higher rate environment heading into 2023." At the same time, "the universe of bonds issued a decade ago that are now eligible to be called on a current basis is relatively small," they said.
By contrast, UBS strategists said, "there is some room for modest expansion in new-money issuances."
They said this is due to voters approving $57 billion out of $63 billion issues on their ballots in the November 2022 election, larger than previous years; most of the disbursement of federal stimulus COVID relief funds, which could prompt certain issuers to return to the capital markets; and the climate portion of the bipartisan infrastructure bill may encourage muni issuances in the years ahead.
Samuel A. Ramirez & Co. projects total issuance will be $380 billion of long-term bonds, an "immaterial change" of 2.7% growth year-over-year from 2022, "mostly driven by still relatively healthy, but essentially flat new-money issuance of $329 billion," according to a Nov. 14 report by Peter Block, managing director of credit strategy at Ramirez.
The firm projects tax-exempt issuance to increase by around 9% to $343 billion and taxable to decline by around 33% to $37 billion.
Ramirez's "muted issuance in 2023 primarily reflects continuation of uncertainty and volatility amidst what we expect to be a continued high-rate environment," the report noted.
Market expectations for peak fed funds rates of around 4.5%-5% continue "to push further into 2023 as the U.S. economy retains extraordinary strength amidst very high, albeit moderating inflation," the report said.
"The primary risk to our forecast is if inflation decelerates, causing peak rates to decline precipitously near term," Block said.
Also, the vast majority of the around $90 billion of new bonds approved across country on Nov. 8 "will likely not see the light of day until at least the end of the year, but more likely 2024 onward," the report noted.
On the lower end, Tom Kozlik, managing director head of municipal research & analytics at HilltopSecurities, said neither economic growth, higher taxes or fees, nor a favorable interest rate environment "are trending in a direction that would support even a neutral level, much less an increased amount of issuance for 2023 compared to 2022."
He predicts 2023 will see $350 billion of municipal bond issuance in 2023, which will be achieved by just over $29 billion of monthly issuance. He said it is unlikely monthly issuance will top $40 billion more than once next year.
"It might not happen at all," Kozlik said. "There is just not enough momentum to propel issuance back to the market peaks we saw in 2020 and 2021 on a monthly or overall basis."
New-money activity is estimated to drop to just under $300 billion, not too surprising "especially because new-money has hovered between about $290 billion and $345 billion going back to 2019," he said. Refunding issuance in 2023 will drop slightly also. Overall, Kozlik expects refundings to make up about 15% of total issuance and come in at about $53 billion.
Alice Cheng, a municipal credit analyst at Janney Montgomery Scott, forecasts volume falling somewhere between $302 billion and $375 billion, with issuance higher in Q1 and Q4 than Q2 and Q3 when the market slows down as it tries to "find its footing in terms of rates and how to move forward with any financing."
"Depending on the severity of the recession, some of these municipalities will be cutting back on their projects and capital spending, and only moving forward with what needs to be done on a project already started," she said.
Otherwise, municipalities may hold off and use federal aid for their needs until 2024, contributing to the lower bond volume for next year.
Environmental social and governance-labeled issuance will continue to keep pace in the upcoming year. Even though volume is lower in 2022, ESG-labeled bonds keeps pace year-over-year, she said.
CreditSights strategist Pat Luby said his estimate is closer to the $350 billion end of the spectrum than $500 billion. He said what's important for the market is the pace of issuance, which could be backloaded to the second half of 2023, causing the market to underperform.
The market is currently pricing in a peak of fed funds in about the middle of 2023, he said, and historically, yields start to rally before the Fed has completed its hiking cycle.
"So I wouldn't be surprised to see issuers who have the flexibility about when they borrow to deemphasize the first part of the year when the Fed is likely to still be raising rates and try to borrow more in the second half of the year," Luby said.
