Muniland will keep shrinking

May 23, 2014

Thomson Reuters

One of muniland’s most accurate forecasters, Tom Kozlik of Janney Capital Markets, has some astonishing numbers in a new report. He predicts that total municipal bond sales for 2014 will drop to between $250 and $275 billion. That is a big fall from 2013 issuance of $330 billion. Here are some of the factors that Kozlik used to develop his rationale for a shrinking muniland:

  • Higher interest rates
  • Use of direct bank loans
  • Austerity measures
  • Less flexibility in spending
  • Political and voter attitudes
  • Lack of broad public policy supporting infrastructure spending

Kozlik goes further and says that the same factors will cause issuance to fall further in the next one-to-three years. So muniland could shrink for the next three years. Couple this with extraordinary demand for municipal bonds, and it’s an issuers’ market.

Most of Kozlik’s theory has already been dissected, but he brings in a sociopolitical angle that is not often discussed. The lack of broad public policy support for infrastructure spending is a significant issue. Reuters reported a poll in which California voters said they prefer paying down debt to broadening the social safety net.

California Governor Jerry Brown’s insistence on paying down debt and stockpiling savings instead of increasing funding for social services for the poor resonates with voters, who support the idea overwhelmingly, a new poll shows.

The study by the Public Policy Institute of California showed that 57 percent of likely voters prefer Brown’s proposal of paying debts and saving cash for hard times, compared with 39 percent who say the state should shore up its tattered safety net.

Taxpayers seem to be adjusting their willingness to pay for social infrastructure. This has implications for municipal bond issuance.

Kozlik included a chart in his report that maps local government revenues from U.S. Census data. Local government revenues have flat-lined, leaving no space for expanded debt service or social spending.

U.S. Census Bureau

Kozlik is projecting that future debt issuance will decline. Moody’s says in a new report that the amount of outstanding debt of states continues to flatline:

The rate of growth in the outstanding debt issued by the US states in 2013 slowed for a fourth consecutive year and was also the slowest growth in debt for the last 20 years, says Moody’s Investors Service in ‘2014 State Debt Medians: Appetite for Borrowing Remains Weak.’ Moody’s expects state debt levels to continue to show only modest growth in 2014.


Is America shaking off an addiction to debt? Or is it that volatile budgets have crowded out the appetite for more debt? From Moody’s again:

‘The continued slowdown in the growth of net tax-supported debt primarily reflects a new conservative attitude toward debt among the states,’ says Kimberly Lyons, a Moody’s Assistant Vice President and Analyst. ‘Growing spending pressures coupled with inconsistent revenue growth and uncertainty over future revenue trends have forced states to take a cautious approach when considering the addition of new debt service costs to their budgets.’

Muniland seems to be permanently contracting. Will we see declining employment among bankers, traders, bond attorneys and municipal advisors? Or will competition heat up among the remaining players in muniland and cause lower margins and better service for issuers and investors? Stay tuned.

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