June bond volume is highest of year, but still down 9%

June municipal bond issuance dropped 9% from 2022 as uncertainty over Federal Reserve policy and market volatility continued, but the total was the highest month of the year.

June’s total volume was $34.436 billion in 744 issues, down from $37.775 billion in 984 issues a year earlier, according to Refinitiv data, and lower than the $40.843 billion 10-year average.

For the first half of the year, total issuance was at $174.768 billion in 3,719 issues, down from $218.230 billion in 5,444 issues from the same period in 2022. Volume for the first half of the year is still down 20%.

Tax-exempt issuance fell 7.9% to $30.819 billion in 651 issues from $33.464 billion in 855 issues in 2022. Taxable issuance totaled $2.804 billion in 85 issues, down 17.2% from $3.386 billion in 119 issues a year ago. Alternative-minimum tax issuance dropped to $812.1 million, down 12.2% from $924.9 million.

New-money issuance fell 12.7% to $27.579 billion in 660 transactions from $31.581 billion a year prior. Refunding volume decreased 4.2% to $3.744 billion from $3.907 billion in 2022.

June volume saw an uneven distribution of issuance week-to-week.

“It’s been back and forth,” said Matt Fabian, a partner at Municipal Market Analytics. “It’s been a hard summer for issuance, and it makes sense that it would be a little lumpy, with big deals scattered and then otherwise issuance going down.”

Some weeks, like the holiday-shortened week and the Federal Open Market Committee week in mid-June, saw lackluster supply.

Issuance during FOMC meeting weeks is usually light. Even though market participants expected the Fed to pause hiking rates in June — which it did — there were still questions about future rate hikes that led to some investors sitting on the sidelines, awaiting more clarity, said Cooper Howard, a fixed income strategist at Charles Schwab. The dot plot currently shows the Fed hiking rates another 50 basis points this year.

“The message that the Fed has been sending is a difficult message that they’re trying to get across to the market,” he said. “That’s one of the reasons why you’re seeing participant issuance tread a little bit cautiously.”

Other weeks, like the last week of the month, saw several large deals come to market including $1.49 billion of tax and revenue anticipation notes from Los Angeles, an upsized $1.24 billion of GO refunding bonds from Massachusetts and the nearly $1 billion of competitive Georgia GOs.

“One of the reasons why is that aspect of the seasonality of the market,” Howard said. “They know that it’s not surprising that the amount of money coming into the market has substantially picked up so there’s demand there.”

Issuers, he noted, “are starting to say, ‘OK, well, we’ll come into the market at this period of time because we are seeing stronger demand and we can take advantage of that.”

June also marked somewhat of a comeback for taxables.

There might have been some issuance held over ahead of the Fed, as investors waited to see what it would do at its June meeting, according to Fabian.

“That’s probably the case, on the taxable side, as taxable issuance can be more rate-sensitive than tax-exempt,” he said.

Issuers tend to issue tax-exempt issuance for specific projects and projects usually don’t “live or die by 20 basis points.”

Tax-exempt issuance has seasonal trends and quarter-to-quarter shifts based on rates, but it doesn’t usually “require fine-tuning based on rates.”

However, he said the uptick in taxables may not be sustainable.

For the year, Howard said there has been limited supply coming to the market, which has led to a significant decrease year-over-year.

There were concerns over the Fed’s tightening cycle and how much volatility that would create in the market, along with concerns over the debt ceiling,  banking turmoil and a volatile Treasury market, he said.

“Lower-than-expected issuance is principally attributed to issuers’ reluctance to do more new financing in a higher rates environment,” BofA Securities strategists said. 

They said the “only other time issuers’ new-money issuance volume was impacted by high rates was in 2000.”

New-money issuance volumes did not see “clear declines during Fed tightening cycles in 2004-2006 and 2016-2018.”

Due to the drop in issuance year-over-year, BofA Securities revised its forecast downward from $500 billion to $400 billion at the end of the first quarter. However, now they noted their revision may be too high.

“For the second half of the year, as long as muni rates do not stay high for too long, our revised issuance target for the year should still be possible,” they said.

They noted range bound behavior of muni and UST rates during the first half of the year is not sustainable.

“A downside break of this range behavior should bring more new-money issuance as well as accelerated refunding issuance,” they said.

In the second half of the year, some market participants expect to see an uptick in issuance.

For example, the state budget numbers that have been trickling look pretty good and there’s an increasing backlog of projects that need to be financed for the bond market, Fabian said.

For the backlog of projects, he said federal aid has been only an intermittent offset issuance. So, he noted there are still projects that need to get done.

“Whether it is the second half of this year or the first half of next year, there is an increase [in issuance] coming,” he added.

However, this will not be seen across the board.

“There’s some reason for optimism for the second half, but that it’s not nationwide,” he said.

Issuance details
Revenue bond issuance decreased 11.7% to $20.327 billion from $23.030 billion in June 2022, and general obligation bond sale totals dropped 4.3% to $14.109 billion from $14.744 billion in 2022.

Negotiated deal volume was up 7.2% to $26.088 billion from $24.337 billion a year prior. Competitive sales decreased 11.1% to $7.516 billion from $8.460 billion in 2022.

Deals wrapped by bond insurance fell to $2.731 billion in 120 deals from $2.908 billion in 151 deals in 2022, a 6.1% decrease.

Bank-qualified issuance dropped 10.8% to $798.1 million in 202 deals from $895.1 million in 229 deals a year prior.

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

Issuers in the Lone Star State accounted for $26.719 billion, up 7.9% year-over-year. California was second with $25.791 billion, down 6.4%. New York was third with $17.297 billion, down 35.7%, followed by Illinois in fourth with $7.849 billion, up 18.3%, and Florida in fifth with $5.919 billion, a 39.5% decrease from 2022.

Rounding out the top 10: Georgia with $5.132 billion, down 9.9%; Wisconsin with $4.950 billion, down 9.2%; Massachusetts with $4.572 billion, down 7.4%; Michigan at $4.521 billion, down 39.1%; and Oregon with $4.499 billion, up 39.6%.