The Municipal Bond market experienced a surge in issuance in May, surpassing $40 billion for the first time since 2016. The current volume of $43.957 billion in 866 issues represents a significant increase of 46.9% from the previous year. This surge in issuance can be attributed to several factors, including Federal Reserve policy uncertainty, pent-up capital needs, and the emergence of mega deals in the market.
Matt Fabian, a partner at Municipal Market Analytics, described the issuance in 2024 as the “strongest” in a decade, with total issuance reaching $191.353 billion year-to-date, up 33.5% from the previous year. The market saw a rapid start to the year, with May’s volume surprising on the high end. James Pruskowski, chief investment officer at 16Rock Asset Management, noted that issuance looks to be on pace to potentially hit $450 billion in 2024.
One of the key factors contributing to the surge in issuance is the acceptance of the “psychological hurdle” by market participants that interest rates are unlikely to return to previous levels. Peter Block, managing director and head of Municipal Strategy at Ramirez, pointed out that issuers with deferred and new-money needs are tapping the capital markets after realizing that “life goes on.” This shift in mindset has propelled issuers to access the municipal market at a rapid pace.
Mega deals have also played a significant role in boosting issuance, with deals such as the $1.8 billion of General Obligation Bonds from Illinois and the $1.8 billion of future tax-secured subordinate bonds from the New York City Transitional Finance Authority driving supply. These mega deals, along with others like the $2.243 billion of sewer revenue warrants from Jefferson County, Alabama, and $3.1 billion of Brightline Florida Passenger Rail Project revenue bonds from the Florida Development Finance Corp., have contributed to the overall increase in issuance volume.
Looking ahead, issuance is expected to remain elevated in the coming months, with June historically being the second highest monthly volume after October. The new-issue calendar for the first week in June climbed to $14.4 billion, marking the highest weekly level since December 2017. Despite the overall positive trend, there are concerns about supply overhang and potential market volatility due to upcoming events like the Fed meeting and the Consumer Price Index release.
Tax-exempt issuance saw a significant increase, rising by 42.3% to $38.438 billion, while taxable issuance rose by 118.1% to $3.679 billion. Alternative-minimum tax issuance also saw a notable increase, reaching $1.84 billion, up by 50.2% from the previous year. Both new-money and refunding volumes experienced growth, with the former rising by 51% to $31.106 billion and the latter increasing by 19.9% to $6.011 billion.
In terms of issuance details, revenue bond issuance increased by 51% to $28.885 billion, while general obligation bond sales rose by 39.6% to $15.072 billion. Negotiated deal volume was up by 65.5%, indicating strong demand in the market. Competitive sales also increased, rising by 20.6%. Bond insurance, however, fell by 13.5%, while bank-qualified issuance rose by 15.3%.
California claimed the top spot in terms of issuance year-to-date, accounting for $30.909 billion. The state saw a 39.9% increase in issuance compared to the previous year. Texas followed closely in second place with $25.252 billion, up by 11.1%. New York, Florida, and Massachusetts rounded out the top five in issuance volume, each experiencing significant year-over-year growth.
Overall, the surge in municipal bond issuance in May can be attributed to a combination of factors, including market participants’ acceptance of new interest rate norms, the emergence of mega deals, and favorable financial conditions. As the market continues to evolve, issuers and investors should remain vigilant and adaptable to changing trends and market dynamics.