Survey says: 2023 issuance will be the same; rates will rise

On the heels of municipal bond issuance disappointing in 2022, nearly two-thirds of market participants in a Bond Buyer live market survey said they expect 2023 issuance to remain around last year’s levels.

The muni market saw $384.086 billion of debt issued in 2022, down 21% year-over-year, as issuers were flush with cash and rising interest rates stymied refundings and taxable issuances.

Of the market participants surveyed, 66% percent think 2023 issuance will remain around 2022 levels, while 24% think it will be lower than last year and 10% think it will rebound to around 2020 and 2021 levels.

This split is in line with firms’ mixed issuance forecasts for 2023.

“If you look at the predictions for this year, I’ve seen anywhere from $350 billion to $500 billion,” Rick Kolman, managing director and head of Municipal Securities Group at Academy Securities, said at The Bond Buyer National Outlook conference Thursday during a live market survey, sponsored by Fitch Ratings. “There is a huge range.”

For issuers, he said, it’s not just about where rates are but stability. “When [bond issuers] hear instability, volatility, it definitely slows them down,” he said.

However, he expects less volatility this year. “I think that’s going to bring some confidence back to the muni market,” he said. “So I’m more optimistic that we might actually do better than we think.”

Despite the lower volume in 2022, ESG-labeled bonds remained about the same last year versus 2021, propelled by an increase in the social and green portions of issuance.

With the growing focus on ESG factors, most think ESG-label/designate issuance will continue to increase over the next two to five years. Seventy percent of respondents believe the growing focus on ESG factors will see moderate growth, while 26% think it will be significant growth. Only 4% think it will have no impact on growth.

Nathaniel Singer, senior director at PFM, pointed to a deal from Chicago several weeks ago with social and non-social bonds and found no pricing difference. In fact, there were some matching maturities with the same coupon, call features and ratings for the social and non-social bonds, and based on market demand, the social bonds priced three to five basis points through the non-social bonds.

“As long as you get a pricing benefit, it’s going to accelerate the growth of the sector,” he said.

But with that growth comes the need for discussions about the standardization of disclosure, the need for universal language and materiality.

“The call for standardization and disclosure that is not overly burdensome to the issuer is extremely important,” said Diana Hamilton, president at Sycamore Advisors.

Bond outflows and bid wanteds reached record levels in 2022, which contributed to municipal underperformance versus USTs.

“It was a really rough year,” Kolman said. The good news, he noted, is there have been multi-week, multi-billion-dollar inflows in January.

Outflows will stabilize this year, according to 41% of market participants, while 31% think outflows and bid wanteds will continue and 28% think inflows will rise and bid wanteds will decline.

“So, if we’re going to be in a little more of a stable range, I don’t think that we’re going to have that negative tone in the market from the bond outflows,” Kolman said. “I believe it’s going be more of a positive tone overall.”

For the most part, munis are off to a good start in 2023. As of Friday, on a year-to-date basis, the muni five-year has decreased 50 basis points, the 10-year fell 49 basis points and the 30-year decreased 35 basis points, according to ICE Data Services.

Over the next six to 12 months, 42% of survey respondents believe muni rates will rise, while 31% think rates will fluctuate. Only 19% said rates will fall, and 8% think muni rates have peaked and will remain at their current levels.

The Fed hiked interest rates seven times in 2022 and most recently implemented a 25 basis point rate increase at the Federal Open Market Committee meeting Wednesday.

There is no consensus among economists on rates, said Hamilton, noting some predict a quarter point rate hike at the March meeting, while others think there will be a quarter point rate hike in March and at the May meeting.

She said the market read Fed Chair Jerome Powell’s press conference as dovish, so “they’re pricing in rate cuts later on.” But that was before Friday’s massive gain in nonfarm payrolls.

Wherever rates end up, 89% of market participants responding believe interest rates will have the biggest impact on the public finance industry in 2023.

However, the panelists disagreed with the live survey results.

Hamilton and Kolman thought stability would have the greatest impact on the industry. Kolman said he spoke to many issuers last year and they said, “I want some stability. I want it to be calm. And that was kind of a driving force and a lot of the conversation.”

But, as Hamilton reminded him, “We live in an uncertain world.”

Market participants listed inflation/operating expenses (54%) and labor pressure (27%) as the factors that will have the greatest impact on issuer credit this year, with Arlene Bohner, head of Fitch Ratings’ U.S. Public Finance Department, believing the latter would have the biggest impact.

“Labor pressure is the thing we’re hearing from all of our issuers that they’re having trouble dealing with, both from the standpoint of being in a rising wage environment, and also a difficulty in procuring actual people to fill the jobs that they need to fill,” she said. This, she said, is of particular concern for hospitals and healthcare.

“Some of them are having to come up with innovative ways of dealing with their staffing challenges,” she said.

If issuance doesn’t return to 2021 levels, 84% of respondents said there will be staff reductions, while 16% think staffing will remain appropriate at current levels.

“Most of our clients flush with cash; they have a lot of opportunities,” Singer said. “But things are going to start getting harder because we’re starting to see some deficits pop up.”

“Maybe the Fed overdid things,” he said. “So we are starting to see the economy start to slow down. But I think the markets will start getting more difficult, and issuers are going to need our help.”

In 2022, rating upgrades outnumbered downgrades. For this year, 53% answered there would be a relative balance between upgrades and downgrades, 36% said downgrades will outnumber upgrades and 11% think upgrades will outnumber downgrades.

Most of Fitch’s public finance sectors have a deteriorating outlook for 2023, which means the operating environment for most issuers is going to be more challenging, said Bohner.

“This year, they’re going to face more headwinds, but in many cases, many issuers are entering into this more difficult environment better positioned than they’ve been in a very long time,” she said.

This, though, may not translate into rating changes.

“We think many public finance issuers just inherently have resilience and ability to control their operating budget and, and some of them have built up resilience throughout the pandemic,” she said.