Divergence in Issuance Trends Between Corporations and Municipalities

U.S. localities sought voter approval last week for $18 billion of bonds for projects ranging from school improvements to road repairs.  According to Bloomberg, this total is less than half of the 2007 record for an off-year election and illustrates municipal officials’ wariness in adding debt to what are already stretched balance sheets.  Overall, the municipal market has shrunk for two years in a row for the first time since 1996, according to the Federal Reserve.  Corporations, on the other hand, are showing no reluctance to issue debt, with corporate issuance of $1.38 trillion through October, up 5% versus last year.  Since 2007, the U.S. corporate bond market has expanded by 72% to $5.54 trillion.  The supply/demand imbalances that these issuance trends are creating could have implications for our Blend strategy, where we have the freedom to move back and forth between sectors.  As detailed in recent notes, we have been reducing our exposure to corporate bonds and investing in safe, liquid assets such as government agencies.  Should we see volatility in the corporate or muni market increase, look for us to take advantage by over-weighting these sectors once again.