July saw a total of $42.61 billion in municipal bonds sold, a staggering 41.3% higher than July 2019’s total, as issuers continue to flood the market with deals, specifically taxable muni transactions.
Taxable bond volume increased 518.3% month-over-month to $16.13 billion from $2.61 billion in July of 2019. Year-to-date, taxable volume sits at $68.98 billion. For all of 2019, taxable volume was $70.49 billion.
It was the busiest July in recent memory, dating back all the way till at least 1986. The closet July would be 2008, when the market saw $37.09 billion. This also marks back-to-back months with $40-plus-billion and three times we have seen that much issuance in month for the year.
Last time we saw back-to-back months with issuance in excess of $40 billion was the last three months of 2019 and those were also the only months that year to see that level of issuance.
After seven months, muni volume stands at $248.38 billion in 6,686 deals compared to $203.77 billion in 6,017 transactions during the same time of last year.
“I’m not surprised by the increased volume because of the increase in refunding bonds, but these numbers present some challenges for the market because so much of the growth in taxable is to advance refund older tax-exempt issuance,” said Patrick Luby, senior municipal strategist at CreditSights. “So the ‘headline’ of the increase in volume looks constructive for investors still hoping for greater supply to invest in, but the reality is different, and the overall net reduction in outstanding tax exempt bonds adds to the challenge.”
“About 35% of the issuance in July was taxable,” said Eric Kazatsky, senior municipal strategist at Bloomberg Intelligence.
“This is not surprising given absolute rate levels and the building trend toward using a market which has a deeper investor base and less restrictive use of funds, one example being advanced refundings.”
He noted that between March and May, the market had a ton of deals sitting on the sidelines waiting for some calm to be restored and some direction where the COVID issues were heading.
“We have overcome the liquidty issues the market was facing, and borrowers now understand that the Fed is committed to lower rates and keeping funding markets operating,” he said. “In that sense there is more calm for investors to meet sales by issuers. There are also monies received by CAREs and now a potential further round of stimulus which can help borrowers identify needs and prioritize borrowing plans.”
Kazatsky does not foresee the taxable trend abating anytime soon, “due to flexibility in use of proceeds. If legislators were to allow advanced refundings again, this may slightly cut into the pace of taxables.”
“If you include munis sold as corporate CUSIPs as well, issuance is $93 billion and the taxable sector has increased 386% year-over-year,” he said. “We are still projecting taxables to finish the year in the $125 billion range.”
Luby thinks that munis will continue to see taxable issuance at a higher pace than in the past, as the taxable market is very liquid with global appetite and issuers have greater flexibility on how they can use the proceeds.
“That flexibility can be helpful for issuers trying to balance budgets,” Luby said. “In addition, because taxables can be issued to advance refund older tax exempt bonds, there may be opportunities for issuers to reduce debt service and conserve cash flow.”
Refunding volume for the month was up 161.1% to $12.14 billion from $4.65 billion and new-money issuance increased 20% to $26.14 billion from $21.79 billion.
Issuance of revenue bonds was 39.7% higher to $25.65 billion, while general obligation bond sales rose to $16.96 billion from $11.79 billion.
Negotiated deal volume increased 53.5% to $33.82 billion. Competitive sales climbed 23.8% to $8.45 billion.
Deals wrapped by bond insurance in July jumped 114.4% to $3.23 billion in 176 deals from $1.51 billion in 135 transactions the same month last year.
Five sectors were in the green year-over-year in July. Utilities rose to $5.59 billion from $1.66 billion, general purpose increased to $11.03 billion from $6.99 billion, education deals moved higher to $14.70 billion from $7.99 billion, transportation jumped to $5.57 billion from $4.69 billion and environmental facilities edged higher to $185 million from $98.7 million. The other five sectors saw a decline of at least 17.8%.
California leads all states in terms of long-term muni bonds sold so far this year. All issuers in the Golden State have accounted for $34.31 billion. Texas is second with $33.29 billion, New York is third with $27.42 billion, Ohio is fourth with $13.27 billion and Pennsylvania rounds out the top five with $11.08 billion.
The rest of the top 10 are: Massachusetts with $10.00 billion, Florida is next with $8.22 billion, followed by Maryland at $7.14 billion, then Virginia with $6.92 billion and last but not least, Washington State with $6.31 billion.
“The market, ex-COVID liquidity scare, has been strong on the back of continual inflows and cash coming back to investors. The technical tailwinds for munis are still strong,” Kazatsky said.
So could August see more volume than July?
“I think it will be, as this is a year and a time like no other,” Luby said. “With the market mostly ‘working from home,’ it seems like we may not see the usual late-August lull in activity, plus, Labor Day falls as late on the calendar as it can, so waiting until after then could really work against issuers who want to wait until summer is over before coming to market.”