Bonds

On heels of positive yearend momentum, January issuance rises

January issuance was up year-over-year as positive market momentum from yearend, growing capital needs, tighter credit spreads and planning for dwindling federal stimulus dollars prompted issuers to come to market.

January’s total volume rose 16.1% to $27.928 billion in 474 issues from $24.056 billion in 497 issues in 2023. Issuance for the month is slightly above the $27.666 billion 10-year average, according to LSEG Refinitiv data.

Tax-exempt issuance rose 32.7% in January to $26.811 billion in 418 issues from $20.208 billion in 427 issues in 2023. Taxable issuance totaled $1.092 billion in 55 issues, down 66.8% from $3.292 billion in 67 issues a year ago. Alternative-minimum tax issuance fell to $25.7 million, down 95.4% from $556.7 million.

New-money rose 22.4% to $21.342 billion from $17.432 billion a year prior. Refunding volume fell from a year ago to $2.407 billion from $5.698 billion in 2023, marking a 57.8% decrease.

January’s increase from 2023 is “good news” as issuance seems to be turning a corner, said Alice Cheng, a municipal credit analyst at Janney Montgomery Scott.

The market ended last year in the black after a two-month rally leading to more positive sentiment on market conditions, despite yields rising on the month, she said.

The increase in issuance can be attributed to positive economic data and the “floor of credit quality” in Q4 2023 that carried over into the first month of 2024, said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

During the first three quarters of 2023, issuers were concerned about adding debt to their balance sheets, he said.

However, once stronger economic data started to be released and recession predictions slowed, issuers became more willing to add debt to their balance sheets.

That, he said, is one of the reasons why January was so strong.

For some issuers with capital needs that had been using the “wait and see” strategy to time the market saw January as the time to come, Cheng said. Other issuers also are beginning to plan for when federal stimulus money is exhausted, turning to the debt markets to fund capital projects and maintain their cash reserves, she said.

“With a calmer market tone, it’s a good entryway to start 2024,” Cheng said.

The rise in volume was buoyed by several billion-dollar pricings, including $2.3 billion of sewer revenue refunding warrants from Jefferson County, Alabama; $1.4 billion of GOs from Massachusetts; $1.4 billion of general revenue bonds from the Regents of the University of California; and $1 billion of general revenue bonds from the New York State Thruway Authority.

While these deals had been in the works for months before January, Kozlik said there is a timing element in coming to market.

“The fact that [issuers] were OK with the levels that they were seeing, especially with where yields had been,” Kozlik said that it may be a signal that issuers are comfortable with bringing more bonds to market for the rest of the year.

The turnaround in issuer sentiment that began in November and continued through this “very strong” January will likely extend through most of the year, Kozlik said.

Some months may be better than others, but there is a favorable issuer sentiment due to macroeconomic data, including the positive fourth quarter GDP report, he said.

For 2024, most muni firms expect issuance to rise year-over-year, with totals ranging from a low of $375 billion from Ramirez & Co. to a high of $425 billion and $450 billion from MMA.

HilltopSecurities, which initially predicted issuance would be at $330 billion of 2024, has since revised its forecast upward to $420 billion following improved macroeconomic conditions. This equates to around $35 billion per month.

The dearth of supply in 2022 and 2023 along with the larger reinvestment dollars in January and February, has also driven demand, Cheng said.

Credit spreads are tighter, so for issuers, “now may be a better time to go to market, given the more favorable environment, rather than wait until later where things may change,” she said.

Fed rate cuts are expected in the second half of the year, so issuers have to pick and choose when to enter the market to fund their capital needs, she said.

With issuers contending with rates being “higher for longer,” it becomes the question of how long are they willing to wait before coming to market, she said.

Cheng believes issuance will be slightly higher in 2024, predicting it will fall between $385 billion and $405 billion. This is because many issuers are “running out of cash, and they need to make sure that balance sheets have enough liquidity” to avoid drawing on their reserves. Issuers are cognizant that having enough cash on hand is necessary to prevent ratings downgrades amid any economic downturn, she said.

Botth Kozlik and Cheng expect supply to be front-loaded this year due to the presidential election in November.

This, Cheng said, will prompt some issuers to come to market before then to avoid the “high political risks.”

Issuance details
Revenue bond issuance increased 33.2% to $17.459 billion from $13.112 billion in January 2023, and general obligation bond sales fell 4.3% to $10.469 billion from $10.944 billion in 2023.

Negotiated deal volume was up 29.1% to $22.267 billion from $17.243 billion a year prior. Competitive sales increased 9.2% to $5.567 billion from $5.098 billion in 2023.

Deals wrapped by bond insurance saw a 12.9% decrease to $4.038 billion in 97 deals from $4.635 billion in 92 deals in 2023.

Bank-qualified issuance fell 14.9% to $487.7 million in 127 deals from $573.4 million in 129 deals a year prior.

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

Issuers in the Golden State accounted for $5.003 billion, up 90.9% year-over-year. Texas was second with $3.575 billion, down 24.6%. Alabama was third with $3.063 billion, up 195.8%, followed by Massachusetts in fourth with $2.575 billion, up 2,101.2%, and Florida in fifth with $1.356 billion, an 8.7% decrease from 2023.

Rounding out the top 10: Minnesota with $1.231 billion, up 289.7%; Washington with $1.170 billion, up 68.8%; Illinois with $1.041 billion, down 11.7%; Georgia with $972.1 million, down 23.9%; and North Carolina with $871.3 million, up 1,316.2%.

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