The municipal bond market is experiencing an unprecedented surge, raising the anticipation that this upward trajectory will persist beyond the upcoming November elections. At a recent infrastructure conference hosted by The Bond Buyer in Philadelphia, industry experts reiterated the dynamic climate surrounding municipal bond issuance in 2023, highlighting an exceptional year characterized by a historical peak in volume and an optimistic outlook for future deals.
According to Paul Creedon, the managing director and head of national infrastructure at Janney Montgomery Scott LLC, 2023 has been nothing short of extraordinary. As he noted, the momentum observed since late 2023 illustrates a crucial shift towards prioritizing core business interests among municipal issuers. By establishing a “run rate” suggesting total supply could reach a staggering $470 billion, Creedon emphasized that the coming months might witness records being broken. Such exuberance is stoked by recent policy changes, including a significant 50-basis point rate cut delivered by the Federal Reserve, which has galvanized market activity, particularly in August, when issuance hit unprecedented levels.
Historically, elections often induce a slowdown in bond issuance, as stakeholders exhibit caution in the face of potential political shifts. However, Rob Dailey, head of public finance at PNC, expressed a contrarian viewpoint, asserting that the current trends are more likely to defy this typical behavior. He cited normalized rates, a resolution to supply chain disruptions, and adjustments to project cost inflation as the driving forces behind this push for sustained issuance. With significant changes to the economic landscape since the pandemic, the municipal bond market is adapting rather than retracting, reflecting a resilience many did not anticipate.
Despite the optimistic forecast for bond issuance, the construction sector faces its challenges. John Medina, senior vice president at Moody’s Global Project and Infrastructure Finance team, emphasized that while the spike in construction costs post-pandemic has eased, elevated project prices are expected to persist due to workforce shortages. As the U.S. construction market remains one of the most active globally, these labor constraints contribute to delays, thereby exacerbating costs. This intersection of rapid market growth and resource limitations presents a unique challenge for municipal issuers aiming to execute their projects efficiently and within budget.
A notable aspect of recent market dynamics is the significant rise in new-money issuance, which has surged by 27% year-over-year. Moreover, the combined volume of new-money and refunding deals has skyrocketed by approximately 80%. This increase signals a strategic pivot by issuers to capitalize on favorable conditions. As Creedon underscored, the evolving landscape includes the implementation of multiple refunding opportunities such as tenders and Build America Bonds calls, which have notably contributed to the stronger issuance volume we observe today.
As the municipal bond market evolves, ventures into novel infrastructure sectors are gaining prominence. The growing focus on areas such as broadband expansion, clean energy initiatives, and affordable housing symbolizes a robust reimagining of what municipal investments can encompass. Dailey’s insights into the more normalized yield curve suggest that an array of financial structures, including floating-rate notes, will soon be more prevalent in the market. This diversification is indicative of a maturing bond market ready to tackle contemporary challenges while embracing modern investment themes.
The municipal bond market stands at a pivotal juncture characterized by historic issuance levels and a willingness to adapt amidst evolving challenges. Although hurdles remain, particularly in construction costs and labor shortages, the overall outlook appears promising. With increasing diversification across infrastructure domains and an arsenal of innovative funding structures cropping up, municipal bonds may continue to thrive in this competitive economic landscape. As we approach the November elections, the determination of market stakeholders to pursue their objectives bodes well for the future trajectory of municipal bonds.