Volume expectations are a bright spot in muni outlook

Political headwinds and some macroeconomic red flags won’t stop the municipal bond market from setting volume records this year and maybe next.

That’s the view of industry insiders speaking Monday at The Bond Buyer’s California Public Finance conference in San Diego.

Primary market volume has been down year-over-year in every month since August, according to LSEG data.

October’s $55.3 billion was still well above the 10-year average of $49 billion. Issuance year-to-date is $493 billion, up 9.3% from $451.079 billion over the same period — and volume is likely to surpass 2024’s $513.652 billion record by the middle of November.

“We are likely coming off two consecutive years of record bond issuance; can we have a third year of record volume, and how is the increased issuance affecting the business?” asked Andy Nakahata, executive director of the California Infrastructure and Economic Development Bank, who moderated the State of the Industry panel.

“What we are hearing from the states is they expect to issue larger, but fewer deals,” said Oscar Padilla, an S&P Global Ratings director.

“There is a lot in the pipeline, at least here in California that we’ve heard of; big picture, we’ll see some upside next year,” he said.

“We don’t see an increase in the number of deals; so clearly this is playing out through the average construction size,” said Cameron Parks, a Truist Securities managing director.

“The average deal size is up nationally by about a third, where it’s closer to 20% here in California,” he said. “Construction cost, meanwhile, since 2020 is up by about 50%, so we’re seeing what to me is counterintuitive in terms of the pace of that impact in the California market.”

The loss of federal grants, which, according to panelists, has hit higher education and the healthcare sector particularly hard, could also boost issuance, because issuers will need to finance more projects to make up for the loss of funding, said Robert Larkins, a managing director with Loop Capital Markets.

Training the next generation continues to be an issue, from attracting younger workers to how to train them when they arrive given changes to work styles that have lingered in the post-pandemic era, according to panelists.

While Samantha Funk, head of public finance at PNC Capital Markets, said her bank has returned to five days a week in-office, S&P Global Ratings just barely returned to a two-days-a-week mandatory, said Padilla, a director there.

Though Padilla said analysts still travel, because they want to “see clients and kick the tires,” it’s a different environment for junior analysts than when he was learning the ropes, because of the lack of face time.

While California still has strength from its nearly 40 million residents and its concentration of the growing artificial intelligence sector, and a population that skews younger than the nation, the nation’s shift to an older population is a major trend, and could be problematic, Padilla said.

“One in five people in California will be 65 and over within five years,” Padilla said.

In her keynote to open the conference, U.S. Bank Chief Economist Beth Ann Bovino said her economic forecast is for a soft, but bumpy, landing and slower growth marked by higher unemployment and sticky inflation.

She also cited the aging population as an issue.

In 2023 and 2024, immigration was helping to stave off some of the impact the country’s lower birth rate and aging population are having on labor productivity, she said.

“Job creation hit the skids at 29,000 a month for the past few months,” Bovino said. “A year ago, it was 150,000. We are seeing a big trough in terms of job creation.”

The low U.S. birth rate and fewer workers means lower productivity, Bovino said.

The U.S. economy saw 3% growth each quarter from 2023 through 2024, and Federal Reserve Chairman Jerome Powell said the reason for that growth was immigration, Bovino said. He attributed the current slower economic growth to the reduction of immigration, she said.

The Trump administration’s anti-immigrant policies now slow growth of the labor force, and are a drag on economic growth, Bovino said.