Midwest bond sales up year-over-year, but lag national trend

Municipal bond issuers in the Midwest sold a bit more debt in the first half of 2024 than they did a year earlier, but the region largely missed out on big gains in bond volume nationwide.

Midwest bond sale volume rose to $34.377 billion from $33.78 billion, according to data from LSEG, a 1.8% increase.

Midwest issuers sold $13.86 billion of debt in the first quarter, up 5.8% year-over-year, then $20.51 billion in the second quarter, which was down 5.8% from 2023.

Nationwide, bond sales also rose above the previous year’s levels, up more than 32% to $242.162 billion from $183.076 billion a year earlier.

“It’s one of the most noticeable years we’ve had in terms of how much the Midwest is lagging the country in new issuance,” said Richard Ciccarone, president emeritus of Merritt Research Services. “That might be indicative of how the Midwest is looking from an economic growth standpoint. After years of being a leader, we’re seeing that leadership kind of subside. And it’s coming from all sides — it’s coming from refunding as well as new issuance. Projects actually have diminished.”

Refunding volume in the region dropped to $4.3 billion from $4.96 billion, a negative 13.3% change, while new money deals were up 8.4% to $25.8 billion from $23.79 billion and to 1,168 issues from 1,102 issues. 

“We wouldn’t expect it to be a great period for refundings because interest rates rose during the first half of the year,” Ciccarone said. “But it’s a stark difference between the two. Nationally, there was a surprising growth in refundings.”

Some of that was probably due to current refundings, he added, but the Midwest is nonetheless falling behind.

Illinois, Wisconsin, Michigan, Ohio and Minnesota accounted for the most borrowing in the region by volume. By number of issues, the top states were Wisconsin, Minnesota, Illinois, Michigan and a tied Missouri and Iowa.

But Illinois, the state that as usual, was the largest source of municipal debt in the Midwest, has gotten a bit more conservative, with some of the debt it issued in 2024 being refunding debt.

And Ciccarone noted that Minnesota and Ohio had the biggest increases by volume.

Debt LSEG classified as for the education sector led the way in the region with 570 issues and $11.219 billion in volume, down from $12.157 billion a year earlier. It was followed by general purpose, which was also down by volume from 2023; housing, which grew both by issues and by nearly $2 billion in volume; utilities, which increased by issues and volume; and healthcare, which ticked up slightly by volume. 

The education sector is usually the largest source of bonds in the Midwest and nationally. But in the first half 2024 the numbers revealed a disparity: the U.S. saw a 27% surge in education bonds, while the Midwest saw an 8% decline.

“Declining school enrollment throughout most of the Midwest factored into the reduced appetite for new money,” Ciccarone said, noting that sensitivity to raising taxes and the Midwest’s higher median age were impediments to K-12 education financing. 

“Midwestern school bond refundings were notably negative for the Midwest despite being higher for the education category nationally,” he added. “Only one bond issuer originating in the Midwest ranked among the top ten in the nation.”

Housing bond growth was one bright spot for the Midwest: it was up 32% from an already decent base, reaching $5 billion. While the region has more reasonable housing costs than some parts of the country, housing affordability is an issue there, and this year saw states like Illinois, Ohio and Michigan reinvigorating their housing programs.

“For a long time, state housing agencies were dormant,” Ciccarone said. “When interest rates were at historic lows, the difference from getting a tax-exempt bond and bringing down the rate was hardly noticeable to most borrowers. As interest rates went up, the incentive to reenergize the housing agencies was certainly there. The math works better when you have higher rates.”

Ciccarone argued that it’s going to become more compelling to move to the Midwest due to economic affordability and climate concerns, and that may slow the region’s population losses going forward.  

Meanwhile, healthcare, which has historically been one of the Midwest’s stronger sectors, saw anemic 6.6% volume growth there even as volume in the sector more than doubled nationally. 

Ciccarone noted that as healthcare systems become ascendant, multi-state systems will proliferate, making it more complicated to pinpoint where the spending is truly coming from.

“The hospitals are just starting to get into the [mergers and acquisitions] game,” he added. “We will see more activity on that front going forward.”

The electric power sector topped $813 million in the first half in the Midwest, up from $165 million a year earlier. While that reflects a $607 million deal by the Omaha Public Power District, the region’s third largest of the half, Ciccarone said that’s unlikely to be a one-off: “The need for expansion and modernization of electric systems means that trend is likely to stick around,” he said. “That sector will become more interesting and prevalent in the Midwest.” 

Overall, Federal Reserve policy expectations meant capital projects by states in the region took on less urgency. Many states are waiting to see improvement in borrowing rates, Ciccarone said, and there could be rate reductions in future months that will make it more attractive for them to come to market.

Tax-exempt deals rose by volume and by number of issues in the first half of 2024 — to $31.047 billion from $29.058 billion and to 1,220 from 1,138 — while taxable volume was nearly cut in half and the number of taxable issues also dropped.

The number of issues wrapped with bond insurance increased to 265 from 182 even as the volume of insured bond debt shrank, going to $3.639 billion from $3.8 billion. 

Illinois led the list of the region’s largest first-half deals, with a $1.8 billion general obligation sale on May 7. The Illinois state government was also the region’s top issuer, with $2.4 billion, followed by Wisconsin at $1.141 billion.

The Illinois Finance Authority had the second-biggest deal, selling $1.02 billion as a conduit for the University of Chicago in May. That lifted the IFA to third-place among issuers, with $1.14 billion.

BofA Securities, JP Morgan Securities and RBC Capital Markets were the top bookrunners in the region during the first half of the year, credited by LSEG with par amounts of $4.329 billion, $4.064 billion and $3.59 billion, respectively. Rounding out the top 10 were Stifel Nicolaus, Robert W. Baird, Jefferies, Piper Sandler, Barclays, Siebert Williams Shank and Morgan Stanley. 

PFM led among the region’s financial advisors, credited with $6.2 billion, followed by Baker Tilley at $2.4 billion and Public Resources Advisory Group at $2.3 billion.

Chapman and Cutler claimed the top spot among bond counsel, credited with $3.6 billion, followed by Kutak Rock at $3.3 billion and Quarles & Brady at $2.3 billion.