January volume down 17% from ’22

January municipal bond issuance declined 17% year-over-year as issuers entered the new year facing uncertainty amid a rising rate environment, still too-high inflation and the possibility of recession. 

Total volume for the month was $21.931 billion in 417 issues versus $26.292 billion in 770 issues a year earlier, according to Refinitiv data.

Tax-exempt issuance was down 6.3% to $19.218 billion in 360 issues from $20.520 billion in 663 issues in 2022. Taxable issuance totaled $2.186 billion in 55 issues, down 48.6% from $4.253 billion in 130 issues a year ago. Alternative-minimum tax issuance dropped to $526.9 million, down 65.3% from $1.519 billion.

New-money issuance fell 19.1% to $15.789 billion in 363 transactions from $19.519 billion a year prior.

Refunding volume increased 20.9% to $5.222 billion from $4.318 billion in 2022.

January is typically a slow supply month, but issuance was especially light this year.

“January issuance is at a multi-year low, with large declines in both taxable and tax-exempt issuance and borrowers still carrying federal cash and not (yet) needing deficit financing through scoop-and-toss or traditional advance refundings,” said Matt Fabian, a partner at Municipal Market Analytics. 

“It’s not really surprising,” said Alice Cheng, a municipal credit analyst at Janney Montgomery Scott, noting lower issuance is a carryover from 2022. 

“It continues the theme of higher borrowing costs because the [Federal Open Market Committee] continues to increase interest rates, but at a slower, more moderate pace compared to what we have seen in the earlier part of the second half of 2022,” she said.

Toward the end of last year, returns were “alarmingly low,” and with unfavorable returns, “there’s a sentiment of like, ‘Do we have the appetite for the supply?” she asked.

Issuers are concerned about meeting investor demand and about higher yields in the unfavorable return markets, she said.

Mutual funds saw massive outflows during the second half of 2022, and even though January brought three consecutive weeks of inflows, issuers are still careful about market appetite, she said.

“Some of the federal stimulus money is still keeping issuers financially flexible in funding their construction costs in this higher interest rate environment,” she said. “So that’s also a contributing factor to lower supply in the market.”

The last week of the month boasted a paltry new-issue calendar as supply was considerably light ahead of the FOMC meeting where the Fed is expected to hike rates 25 basis points.

“Issuers are trying to avoid coming to market during the week when the Fed is meeting,” said Pat Luby, a CreditSights strategist. “If we get some kind of news that suggests that the Fed is closer to being done, then muni issuers will take a harder look at coming into the market.”

“People are watching how the FOMC is coming out with the pace of the future remaining rate hikes,” Cheng added.

“The sooner we get clarity on the rate hikes, the sooner that we can get out of this low issuing supply cycle,” she said.

“We are seeing the light at the end of the tunnel with moderate inflation numbers and job numbers,” she said. “The sooner we get over the hump, the earlier that we can go back to a more robust new-issue calendar.”

Of note, refundings rose year-over-year in January despite being down 58.4% in 2022. 

Luby said the uptick in refundings can be attributed to market timing, with investors attempting to “get ahead of the Fed raising rates,” and noted the pace of refundings may slow in February and March.

“With the market expecting the Fed will continue raising rates, if a refunding was in the money or close to being at a savings hurdle in January, some issuers probably would have decided to go ahead and lock in savings before the Fed raises short-term rates,” he said.

Despite the lack of supply, demand is resurgent. 

“Regular mutual funds have seen three straight weeks of inflows, which may be a sustainable trend,” Fabian said. “And last week had the largest weekly net redemptions by municipal [exchange-traded funds] since last June: maybe showcasing an unwinding of holdings intended to exchange ‘cash alternatives’ for duration.”

“The interest rate environment and the Fed posture, which appears to be slowing issuance,  also appears to be fueling demand from investors,” Luby said.

Issuers may be trying to not come to market right now, but there are plenty of investors trying to lock in yields. 

“So the imbalance between slow supply and the heavier demand has strengthened munis  relative to taxables,” he said.

“Munis, which were rich relative to taxables at the end of last calendar year, have gotten even richer,” he noted. “I don’t think that will discourage individual investors, but it’s going to make it that much more difficult for banks and insurance companies to participate in munis.”

Issuance details

Revenue bond issuance decreased 30.6% to $10.975 billion from $15.813 billion in January 2022, and general obligation bond sale totals rose 4.5% to $10.956 billion from $10.479 billion in 2022.

Negotiated deal volume was down 18.9% to $16.492 billion from $20.325 billion a year prior. Competitive sales increased to $5.415 billion, or 10.7%, from $4.892 billion in 2022.

Deals wrapped by bond insurance declined to $2.284 billion in 84 deals from $3.275 billion in 137 deals in 2022, a 30.3% decrease.

Bank-qualified issuance dropped 42.8%, with $501.6 million in 112 deals from $876.2 billion in 207 deals a year prior.

In the states, Texas claimed the top spot year-to-date.

Issuers in the Lone Star State accounted for $4.528 billion, up 3.5% year-over-year. California was second with $2.143 billion, down 26.5%. New York was third with $1.708 billion, up 21.0%, followed by Wisconsin in fourth with $1.586 billion, up 214.8%, and Georgia in fifth with $1.278 billion, a 34.0% increase from 2021.

Rounding out the top 10: Illinois with $1.144 billion, down 31.7%; Florida with $1.126 billion, down 3.4%; Colorado with $938.0 million, up 39.4%; Tennessee at $799.5 million, up 941.0%; and Washington with $693.2 million, up 361.2%.