Majority of muni shops expect bond volume to rise in 2024

Municipal bond supply projections for 2024 so far are at a high of $450 billion and a low of $330 billion, with most firms anticipating issuance next year will surpass 2023’s lackluster total.

While most firms forecast issuance to rise year-over-year, the figures they present are less than the as well as the Biden administration’s push for more investment in municipal water distribution systems, he noted.

Jeff Lipton, managing director of credit research at Oppenheimer, predicts issuance will be between $390 billion and $400 billion, around 12% up from 2023.

He also anticipates higher new-money issuance and refunding activity, the latter of which will largely be driven by “the level of interest rate declines,” he said.

Lipton pointed out the implications of an election year, and noting “events and circumstances could alter issuance dynamics, although we are not anticipating any new impactful fiscal policies ahead of next November.”

Taxable muni issuance, as a percentage of total volume next year, could see double digits,” he said, though that is also rate dependent. Taxable issuance is currently at $35.484 billion and is 10% percent of the total volume year-to-date.

On the lower end of the spectrum, Peter Block, managing director at Ramirez & Co, said the “higher-for-longer rates should continue to depress muni market gross supply in 2024.”

As such, he expects to see $375 billion of long-term issuance, up about 7% year-over-year. This increase, he said, will mostly be driven by incrementally higher new-money tax-exempt bonds, which should be up around 10% year-over-year to $305 billion. The new-money is needed “to fund a growing backlog of projects for issuers that come to market for capital needs regardless of interest rate levels,” he said.

Taxables are anticipated to be at $30 billion, down only 3%, according to Block. He expects taxables will be around 8% of the total market, mostly to fund new-money needs, as “advance refunding with taxable simply do not work at these levels.”

Current refunding volume with tax-exempts should be flat year-over-year at around $49 billion, despite there being around $550 billion and growing “eligible or to-be-eligible current refunding candidates,” he said.

However, Block notes the primary risk to his forecast is the Fed, whether it cuts or raises rates earlier than the market currently expects.

Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities, estimates issuance at $330 billion due to “the sector’s (mostly) conservative budgeting philosophy, declining U.S. economic growth, and prohibitively elevated interest rates.”

With economic growth being lower in 2024 compared to 2023, he said “this will again pressure new-money issuance.”

Since “state and local government credit quality remains very strong and housing prices appreciated compared to pre-pandemic levels,” new-money issuance will only fall slightly to $280 billion, he said.

Interest rates are “likely to remain prohibitively high,” which will cause refunding issuance to fall to $50 billion.

Monthly issuance is estimated to average around $27.5 billion in 2024, down from the nearly $30 billion average expected in 2023, Kozlik said.

For issuance to be $400 billion, he said the monthly average would need to be around $33.3 billion.

Looking further out, MMA’s Fabian said during 2024 and beyond, “the rising cost of climate change adaptation and related economic transition, the maintenance and replacement burden of existing physical infrastructure, and the depletion of pandemic-era federal aid should begin to push new-money and tax-exempt issuance higher, with an annual $400 billion or more an approachable goal in the medium term,” he said.

And in the longer term, the challenges that issuers face should push annual new-money issuance of more than $500 billion.

“Climate change adaptation is a massive cost for the states which will tap the municipal bond market accordingly,” he said.

“Even assuming no return of the tax-exempt advance refunding, municipals’ regular $100-plus billion annual refunding pace should be re-attainable once yields moderate or once higher yielding current issues become callable,” he added.