The municipal bond market is gearing up for an unusual phenomenon: a bustling January for borrowing, which typically marks the slowest month for new muni bond sales. Historical data from Bloomberg LEAG indicates an average issuance of $25 billion in January over the past decade. However, a comparatively subdued December sales calendar, combined with a decline in interest rates exceeding one percentage point in recent months, creates favorable conditions for increased issuance this January.
Long-term bond sales reached $22.3 billion in December, surpassing the $15.3 billion recorded in December 2022 but remaining below the decade-average for the month at $29 billion. Traditionally, a quieter December tends to precede a more active January.
Nisha Patel of Parametric Portfolio Associates LLC anticipates a surge in January issuance, noting the significant decline in interest rates. Patel suggests that issuers might capitalize on an environment where financing costs are lower, and demand is expected to be robust due to reinvestment flows.
In January, maturing bonds total $20.5 billion, with scheduled calls amounting to $2.7 billion. This means that investors will be seeking opportunities to reinvest over $23 billion.
Several high-profile issuers have already scheduled substantial sales for the month. Jefferson County, Alabama, plans to sell $2.5 billion in refunding revenue warrants, the Conroe Independent School District in Texas is set to issue $568 million in revenue bonds, and the state of Washington intends to receive bids for $948.4 million in general obligation bonds on January 23.
Municipal bond sales in 2023 initially lagged behind 2022 issuance, but sentiment shifted in the fall with expectations of interest-rate cuts by the Federal Reserve. This led to a significant rally in the fixed-income market. Since November 1, the yield on the 10-year AAA BVAL index dropped by over 130 basis points, and returns, which were negative in August, September, and October, turned positive. Municipal bonds returned 6.4% for the year, marking the best performance since 2019’s 7.54%. Long-term issuance for the year totaled $362.6 billion, up 0.4% from 2022.
However, not everyone shares the optimism about a surge in muni sales in January. Tom Kozlik, Managing Director and Head of Public Policy and Municipal Strategy at Hilltop Securities, projects issuance to be around $20 billion. Considering the high sales volume in the last quarter, Kozlik suggests that January might witness increased attention to capital markets due to lower rates, presenting a potential argument for slightly more than $20 billion in issuance.
