Mu­nis Still Lag 2017 In Vol­ume

The Bond Buyer - - Front Page - BY AARON WEITZ­MAN

Mu­nic­i­pal bond vol­ume fell 16% in Oc­to­ber from a year ear­lier as growth in new-money is­suance slowed from re­cent months.

The $33.4 bil­lion of mu­nic­i­pal bonds sales is the sec­ond high­est monthly to­tal this year, just shy of May’s $35.08 bil­lion, ac­cord­ing to Thom­son Reuters data. Ex­pec­ta­tions for a surge in vol­ume in the fi­nal quar­ter should be tem­pered, how­ever, said Peter Block, man­ag­ing di­rec­tor, credit strat­egy at Ramirez and Co.

To­tal gross sup­ply year-to-date is about $269 bil­lion, or down by 12% from the first 10 months of 2017, as the ban on ad­vance re­fund­ings con­tin­ues to weigh on year-over-year com­par­isons. Ramirez is keep­ing its full year 2018 sup­ply pro­jec­tion at $317 bil­lion, or down 27% year over year.

“We think new-money will likely de­cel­er­ate in the fourth quar­ter this year,” Block said. “Given our year-end fore­cast for gross sup­ply of $317 mil­lion, we think gross is­suance should av­er­age about $6.8 bil­lion a week, for an ad­di­tional $48 bil­lion of ad­di­tional gross sup­ply in 2018.”

Only about six of the nine weeks left in the year will see any real new is­sue vol­ume, he said. “If you count the other three weeks that have Thanks­giv­ing, Christ­mas and New Year’s weeks as half weeks, I think the fore­cast is solid and our yearly is­suance

pre­dic­tion hasn’t re­vised all year.”

There were 758 trans­ac­tions dur­ing the month, com­pared with 948 trans­ac­tions to­tal­ing $40.09 bil­lion from Oc­to­ber of 2017. Go­ing for­ward for the re­main­der of the year, it will be tough to com­pare any month to its pre­vi­ous years coun­ter­part, con­sid­er­ing now is about the time when the rush to com­plete deals be­fore tax re­form started.

“There is typ­i­cally a lot of noise in quar­terly is­suance num­bers and there­fore very dif­fi­cult in iso­la­tion to dis­cern a trend one way or the other, which is why I like to look at year to date trend.” Block said. Year-to-date trends show the av­er­age par size of a deal is larger at $36.5 mil­lion per deal, ver­sus $35.2 mil­lion per deal in 2017, he said

Block at­trib­uted the larger par amounts pri­mar­ily to a com­bi­na­tion of is­suers try­ing to get projects funded be­fore rates in­crease fur­ther and to­wards this end, also squeeze out as much cur­rent re­fund­ing as eco­nom­i­cally vi­able.

Alan Schankel, man­ag­ing di­rec­tor at Jan­ney, said he doesn’t be­lieve midterm elec­tion out­comes will have sig­nif­i­cant im­pact on vol­ume in the last two months of 2018.

“Should the GOP re­tain con­trol of both Se­nate and House, it is pos­si­ble that ad­di­tional tax re­duc­tions could be en­acted, po­ten­tially re­duc­ing the value of the tax ex­emp­tion,” he said. “If Repub­li­cans re­tain con­trol, some is­suers might ac­cel­er­ate planned of­fer­ings so as to beat any tax law change.”

Re­fund­ing vol­ume dropped 35.6% to $5.66 bil­lion in 128 deals, from $8.79 bil­lion in 304 deals a year ear­lier. New-money was up 7.3% to $24.14 bil­lion, af­ter in­creas­ing 16.4% in Au­gust.

“I am dis­ap­pointed to see a slow­down in the growth of new money deals which in­creased this month but still well be­low the 25.6% im­prove­ment of the first 3 quar­ters,” said Schankel. “New money is­sues gen­er­ally fi­nance new and con­tin­u­ing in­fra­struc­ture projects, so a slow­down may in­di­cate that ris­ing fixed ex­penses (pen­sions, debt, OPEB) are crowd­ing out needed in­fra­struc­ture in­vest­ment in state and lo­cal gov­ern­ment bud­gets.”

Com­bined new-money and re­fund­ing is­suance dropped 58.5% from Oc­to­ber 2017 to $3.65 bil­lion, while is­suance of rev­enue bonds de­clined 7.7% to $20.75 bil­lion and gen­eral obli­ga­tion bond sales fell 27.9% to $12.69 bil­lion.

Ne­go­ti­ated deal vol­ume dipped 0.4% to $22.74 bil­lion, while com­pet­i­tive sales fell 27.3% to $10.33 bil­lion.

Tax­able bond vol­ume de­creased to $1.49 bil­lion from $2.77 bil­lion, while tax-ex­empt is­suance fell by 16.4% to $30.29 bil­lion. Min­i­mum tax bond is­suance rose to $1.66 bil­lion from $1.11 bil­lion.

“AMT is­suance is up pri­mar­ily due to sev­eral air­port deals that priced this month,” said Schankel. “Steady post-re­ces­sion en­plane­ment growth has con­trib­uted to im­proved fi­nan­cial met­rics for larger air­ports, sup­port­ing is­suance of bonds to fund cap­i­tal in­vest­ment pro­grams.”

Deals wrapped by bond in­sur­ance rose 5.3% to $1.53 bil­lion in 105 deals from $1.45 bil­lion span­ning 116 trans­ac­tions the same time the prior year.

Four of the 10 sec­tors showed year-overyear in­creases, as hous­ing is­suance rose to $2.44 bil­lion from $1.49 bil­lion, pub­lic fa­cil­i­ties in­creased to $1.12 bil­lion from $755 mil­lion, health care went up to $4.19 bil­lion from $3.16 bil­lion and ed­u­ca­tion jumped to $6.58 bil­lion from $6.31 bil­lion.

Just two types of is­suers were in the green this month, as deals from cities and towns in­creased to $5.12 bil­lion from $3.38 bil­lion and state agen­cies was higher to $11.91 from $9.55 bil­lion. All oth­ers saw year-over-year de­clines of at least 10%.

Cal­i­for­nia con­tin­ues to have the most is­suance among states so far in 2018. The Golden State has is­sued $40.41 bil­lion; New York is sec­ond with $36.17 bil­lion; Texas is third with $29.68 bil­lion; Penn­syl­va­nia is next with $12.11 bil­lion; and Florida finds it­self in­side the top five with $9.73 bil­lion.

An­other thing to keep an eye on is the Fed and the path or in­ter­est rate in­creases.

“The Fed does ap­pear to be on pace for a few more hikes through 2019, which will un­doubt­edly af­fect is­suance pat­terns and sup­ply, as well as in­vestor sen­ti­ment and pref­er­ence for cer­tain types of cred­its and struc­tures,” Block said. “This year short and short-in­ter­me­di­ate mu­nis have served in­vestors well as a strong de­fense against rates in­creas­ing and, due to the high de­mand for bonds, out­per­formed al­most all fixed in­come as­set classes.”

Block also said that In­vestor de­mand in the front-end of the curve should con­tinue be strong so long as the market be­lieves the Fed isn’t yet done hik­ing to­wards the neu­tral rate.

“The one big ques­tion mark for me in terms of sup­ply in 2019 is a po­ten­tial fed­eral in­fra­struc­ture bill,” Block said. “If a plan does get im­ple­mented, what is the tim­ing and how it will be funded, in terms of fed­eral ver­sus state ver­sus lo­cal dol­lars and ul­ti­mately sup­ply of tax-ex­empt bonds? Maybe [Build Amer­ica Bonds] re­turn in a dif­fer­ent shape of form. Maybe not, we will see.” ◽

Alan Schankel said fixed ex­penses may be crowd­ing out in­fra­struc­ture in­vest­ment.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.