Bonds

Q4 2023 marked rebound for issuance

Total 2023 municipal bond sale volume ticked down slightly year-over-year, but a robust fourth quarter and a late yearend rally saved last year from being the second consecutive year of issuance down double digits.

Total volume in 2023 was $384.715 billion in 8,081 deals, down only 1.7% from $391.298 billion in 9,185 deals in 2022, according to LSEG data.

Despite this, market volatility, higher interest rates, pandemic aid and slower economic growth kept many issuers on the sidelines.

Firms were mixed on expectations of total issuance for 2023, with estimates falling between $302 billion and $500 billion. Some firms revised their 2023 supply predictions downward over the summer as it became evident that the higher-rate environment was preventing state and local governments from pricing bonds.

“I was definitely expecting lower issuance,” said Tom Kozlik, head of municipal research and analytics at HilltopSecurities Inc., of 2023’s issuance figure.

He initially predicted issuance would be $350 billion due to economic growth being forecasted to be lower than the year before and interest rates would be as high if not higher. He opted against revising his forecast lower mid-year.

However, Vikram Rai, head of municipals market strategy at Wells Fargo, said the yearend volume total was not a surprise.

Rai, while head of Citi’s Municipal Strategy group, forecasted supply at $450 billion. He later revised his forecast to around $400 billion, which he said could be a “heavy lift,” before further revising his forecast downward to around $380 billion.

Tax-exempt issuance rose 4.1% to $328.269 billion from $315.317 billion in 2022. Taxable issuance dropped 26.8% in 2023 to $39.737 billion from $54.280 billion in 2022, per LSEG data.

New-money issuance decreased 3.6% to $298.571 billion from $309.853 billion in 2022. Refundings were up 2.9% to $51.464 billion from $50.004 billion in 2022, according to LSEG data.

The first quarter saw $80.075 billion of issuance, down 22.9%.

“At that point, folks were preparing for a scenario where growth was going to be substantially lower,” Kozlik said. “In some cases, they were expecting that there might be a recession.”

Issuers, he said, “were responding to a situation where they struggled to batten down the hatches for an economic situation like we saw 10-plus years ago.”

The second and third quarters hit $103.002 billion and $98.223 billion, respectively, with the former down 10.3% and the latter ticked up 1%.

But by the middle to the end of the third quarter, the macroeconomic landscape improved and market participants believed a soft landing was possible, Kozlik said.

Then toward the end of the year, economic data came in that proved there would not be a recession in 2023, which “opened up” issuers to start selling debt, he said.

The fourth quarter saw issuance surge 37.1%, rising to $103.415 billion in 2023 from $75.426 billion in 2022.

Issuance for every month surpassed $20 billion, with seven months seeing issuance top $30 billion. No month saw issuance above $40 billion.

In 2023, Rai said “a confluence of inhibitors kept supply much lower than expected.”

First off, this year saw consistent yield volatility that kept municipal issuers on the sidelines and severely hindered refinancing volume,” he said.

There were also expectations of an impending rate rally.

Many issuers sat on the sidelines because yields were too high, prompting them to push deals in the pipelines, he noted.

“Historically, rates have rallied once the Fed goes on ‘hold,'” Rai said. “While we are still uncertain if the Fed is truly ‘on hold,’ the belief among issuers that rates would rally led them to delay non-essential projects as they felt they could finance with better rates in a few weeks or months.”

Following the yearend rally, things have worked out “very well” for those who waited to come to market toward the end of the year and into 2024, according to Rai.

Additionally, many state and local governments had “built up significant cash piles owing to pandemic-related federal aid, and this had also reduced their need to tap capital markets,” he said.

Kozlik said the slight decrease in volume was due to economic growth being a “little bit lower” and higher interest rates.

“When growth slows, state and local governments can’t deficit finance the way that the federal government does,” he said.

“At a time when growth is going to be lower, or there’s going to be a potential recession, it’s hard to think that issuers are going to start to increase their overall issuance activity,” he said. “Because they not going to and in some ways, they’re not able to put themselves in that situation.”

Bond insurance volume rose 5.8% in 2023 to $35.381 billion in 1,398 issues from $33.438 billion in 1,425 issues in 2022, per LSEG data.

Revenue bonds accounted for $234.667 billion in 3,245 issues, a 4.2% decrease from 2022, and general obligation bonds rose to $150.047 billion in 4,836 issues, a 2.6% increase from 2022, according to LSEG data.

Texas was the biggest source of municipal bonds in 2023, per LSEG data.

All issuers in the Lone Star State accounted for $59.032 billion. California was second with $54.474 billion, New York was third with $42.256 billion, Illinois followed in fourth with $14.364 billion and Florida rounded out the top five with $13.468 billion.

The rest of the top 10 were: Pennsylvania with $12.083 billion, Washington with $9.382 billion, Georgia at $9.359 billion, Massachusetts with $8.677 billion and Michigan with $8.570 billion.

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