U.S. Muni Market: 2020 Rate Outlooks Trigger Taxable Supply Uncertainties; Issuance Likely To Skyrocket In Week Ahead

A host of global geopolitical and economic headwinds has generally spurred lower U.S. interest rates, driving an increasing number of municipal bond issuers and investors towards taxable transactions.

In fact, the volume of new taxable deals has soared nearly 107% to date in 2019 over the prior year to a little more than US$44.7bn, according to data compiled by the Securities Industry and Financial Markets Association (SIFMA).

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One reason for the uptick is likely due to the termination of tax-exempt advance refunding bonds in 2018 when many investors looked to similar, taxable transactions to fill the void.

Strategists at Barclays, for example, noted that over the span of just a few months, taxable advance refundings accounted for almost 40% of the taxable muni supply in 2019 – “boosting taxable’s supply share of total issuance, as well as making 2019 the largest taxable muni supply year since 2010.”

Barclays noted that the resurgence of taxable muni supply has been “one of the main stories in 2019 and probably the largest variable going into next year,” depending on the direction of U.S. interest rates.

As they anticipate U.S. Treasury rates will remain in a relatively narrow trading range for most of 2020, they foresee total issuance amounting to around US$410bn to U$420bn, an increase of about 4-5% year-on-year. However, should government bond yields rise, they would negatively affect tax-exempt issuance, with an even larger impact on taxable supply.

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Indeed, within the months of August, September, and October, yields on the U.S. Treasury note toggled within a 43-basis point range, from a trough of 1.47% to a peak of 1.90%. The note was last bid at around 1.76% intraday Wednesday.

Diverging Growth Outlooks

Market participants generally expect a protracted period of low-interest rates, amid continued U.S.-China trade tensions, slowing global growth, weak domestic fixed investment and sluggish inflation.

These conditions had mainly served as the catalysts for the Federal Open Market Committee (FOMC) to cut its target range for the federal funds rate by 25bps three times in 2019 to 1.50%-1.75%.

Nuveen analysts Bill Martin and John Miller noted that while the U.S. economy remains strong, it is “not strong enough to stoke fears of inflation.”

Nuveen expects two additional weeks of outsized municipal new issuance in 2019, “then new issue should be effectively finished for the year.”

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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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