The level of muni bond issuance (muni supply) increased in the third quarter, climbing by over 20% from 2015 Q3. The level of 2016 YTD bond issuance through July had basically been even with cumulative levels through July 2015, but monthly muni supply rose precipitously in the last two months of the quarter, with a year-over-year increase in August exceeding 40%, and 60% in September. Year-to-date issuance through September 30 is now over $334 billion, a 5.3% increase over cumulative supply through 2015 Q3. Muni supply levels so far in 2016 have been driven by new money issuance, which has increased by over 15% from the level of new money supply in 2015. After starting the year slowly, the level of refunding issues has rebounded, particularly in the Q3, with an increase of over 21% from refunding issuance in 2015 Q3. Two possible reasons for the increase in overall supply in Q3 are issuers wanting to take advantage of lower interest rates prior to any rate hikes, and concern over the potential impact of the upcoming November 8 election.
The level of supply can contribute to the performance of muni bonds. The total return of the BofA Merrill Lynch Municipal Bond Index declined in September, down 0.31% over the month, its first decline in over a year. While there was pressure on the price of shorter maturities from upcoming changes to money market fund rules, prices of longer-maturity bonds were pressured by increases in the issuance of long-term muni debt.
We expect that supply will continue to be robust in October as Barclay’s reports that the thirty day visible supply of munis is $23 billion, the highest mark since November 2010. Evidence of this trend was seen in last week’s $13 billion of issuance, and in the $12 billion planned for this week. If the trend continues, 2016 muni supply could hit $430 billion, closing in on the record $433 billion issued in 2013. While supply levels could impact muni returns, that impact could be offset by the demand for munis, which has remained high this year, evidenced by 54 consecutive weeks of positive cash flows into the muni market.
Source: Barclay’s, The Bond Buyer, Fidelity Capital, Morgan Stanley