Muniland is shrinking
Muniland bond issuance is slowing, according to Thomson Reuters data. Year-to-date issuance through June was $176 billion versus $194 billion in the same period a year ago. Thomson Reuters broke down the data by the largest issuing states and region of the country above. The West, likely fueled by California, and the Southwest were the only regions that borrowed more this year than last. It would be interesting to map this against economic growth across the country.
This chart shows how municipal bond issuance for new money projects has remained steady at around $70 billion this year to date, while issuance to refund higher coupon bonds has slowed from $125 billion to $106 billion. As interest rates go up, refunding higher coupon bonds with new bonds slows refunding issuance. If interest rates continue to go up, this source of new issuance will likely shrink considerably.
There are many factors that are weighing on issuance, but the primary one is likely to be the high-rate environment. There are other factors like shrinking federal revenues due to sequestration and rising pension and healthcare costs for state and local governments. There has been more active pressure from rating agencies about future liabilities like pensions and a lot of uncertainty about the direction that Congress will take regarding capping the muni bond tax exemption.
The tone of muniland has changed from rosy bliss to a rocky road this last year. Detroit’s bankruptcy filing must have sent a chill down the spine of every municipal official. Intensifying short-term pressures include massive outflows from municipal bond mutual funds, which crimps their ability to be buyers in the primary market. It’s a stormy sea in muniland.
Muniland is shrinking. Pressures are weighing on issuers and much of their necessary funding can be deferred. It’s likely that muniland will continue to shrink.