U.S. Muni Market: Fed Rate Cut Could Fuel Further Surge In Taxable Supply

The county’s water and wastewater system provides service to an estimated 57k retail water customers, 51k retail sewer customers, and 11 wholesale users.

(Click on image to enlarge)

The latest bond issuance is secured by net revenues of the combined water and sewer system, as well as legally available impact fees.

Fitch Ratings also noted that the issuer’s financial performance “remains stable with debt service coverage (DSC) at about 1.9x the last two fiscal years,” adding that strong liquidity and “affordable rates provide financial flexibility.” These strengths are also likely to help mitigate an expected decline in DSC to around 1.6x in fiscal 2020.

Meanwhile, the taxable Series 2019B bonds will contribute to a growing mountain of taxable issuance as rates remain low.

Strategists at Barclays recently noted that while taxable muni spreads have “widened marginally, in general, taxable supply has been absorbed quite well thus far, as low corporate issuance due to earnings blackouts has definitely been a positive for the market.” Barclays expects taxable supply to remain heavy, “but only if rates stay low.”

Taxable supply in August, for example, had surged, but only after yields fell about 60bps, according to Barclays. “If taxable muni yields start moving higher from current levels (by 25- 40bp), it would make much less sense to issue taxable bonds as well as advance refund taxable bonds with tax-exempts,” they said.

Barclays added that it anticipates more than US$45bn in total muni issuance in October, which is typically a busy month, with up to US$12bn-15bn in taxable muni supply. 

To date in 2019, almost US$300bn worth of fresh muni bond issuance priced, with the Bond Buyer’s U.S. 30-day visible supply signaling another US$15.5bn intraday Monday, according to Bloomberg.

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