Estimated Municipal Issuance in 2024

Now is the time of the year when economists try to estimate, based on historical and projected statistics, what new issuance in the municipal market will be in 2024. Historically, I take out my Magic 8 Ball and tarot cards to do my estimating, but this year I tried, based on relative facts, to figure out if the issuance of municipal bonds in 2024 will be more or less than in 2023.

Reviewing Municipal Bonds in 2023

Below is a chart displaying the historical issuance of municipal bonds over the past several years:

The first step I took was to look at 2023 and see how the 2023 estimates fared versus what actually occurred.

1. As municipal interest rates rose throughout the year, many municipal issuers delayed capital project financing.
   
   

2. Increased interest rates also reduced the economics of refunding and reduced the volume of taxable bonds used to advance refund tax-exempt bonds.

3. During last summer, many 2023 predictions by institutions were lowered due to lackluster issuances in the beginning of the year:

In conclusion of the 2023 estimations, both initial and mid-year revised estimates indicate that the increase in interest rates led to a dramatic reduction in the expected amount of advance refunding issuance and a reduction in the expected amount of new issuance. Most investment banks’ estimations overshot the actual issuance number, even after their mid-year adjustments.

Anticipating 2024 Economic Positives & Roadblocks

The second step I took was to look at what were potential economic positives and roadblocks for municipalities in 2024:

Debt Issuance to Meet Capital Needs
Municipalities have stayed on the sidelines during 2023 due to the higher interest rate environment and will need to issue debt in 2024 to meet capital needs.

Stored Cash Due to Revenues and Federal Subsidies
Municipalities were able to “store up” extra cash they received on both revenues and federal subsidies during 2023 which can be used to fund all or portions of capital projects. Note: Municipal issuers tend to want to hold onto their cash during potential recession times, thus issuing more debt to meet capital project needs.

Over $109 Billion in Issuance Bond Resolutions Passed
Over $109 billion in issuance bond resolutions passed in 2023. That does not mean that all $109 billion will be issued in 2024 but a portion will.

Stronger Municipal Issuance in Presidential Election Years
In presidential election years, municipal issuance has been stronger in the first part of the year, prior to the anticipated market volatility due to political ramifications.

Interest Rate Uncertainty, Hikes Predicted to End
No one is sure when and/or if the Fed will lower interest rates.

• If interest rates do drop, expect new issuance to build steam and refundings to potentially become economical again. (Probably the second half of the year, if it happens.)

• If rates remain constant, most of the refunding market will stay on the sideline due to a lack of economic benefit.

Note: Securities Industry and Financial Markets Association’s (SIFMA) Economist Roundtable End-Year Survey showed that 86.7% of the respondents believed the Fed is done with hikes, and 46.7% expect the Fed to cut rates in 2Q24. 27.7% expect rates to be cut in 3Q24 and 27.7% expect rates to be cut in 4Q24.

Federal Stimulus Money Available
Federal stimulus money is still available or has been received and not yet spent:

• The American Rescue Plan Act (ARPA) of 2021 is a $1.9 trillion economic stimulus bill. Within ARPA, the Coronavirus State and Local Fiscal Recovery Fund provides $350 billion for states, municipalities, counties, tribes, and territories, including $130.2 billion for local governments split evenly between municipalities and counties.¹ These have been appropriated but a portion of the money has not been spent yet.
  
  
• The Infrastructure Investment and Jobs Act (IIJA), also known as the Bi-Partisan Infrastructure Law, is a bill President Joe Biden signed into office on November 15, 2021. The IIJA provides $973 billion over the course of five years from the fiscal year 2022 through the fiscal year 2026.² 

Next Steps for Bond Market Participants
Will bond market participants be enticed enough by the current high fixed rate long-term bond yields to jump into the market or will they stay on the sidelines and continue to participate in the strong stock market? And if bond yield returns lessen do current bond market participants leave?

Conclusion

There is minimal stability in the market. As I reviewed several investment banks’ analyses of why they were estimating the amount of municipal issuance in 2024, each had a reason why issuance will go up versus 2023 and a reason why issuance will go down versus 2023 (i.e., there is no consensus on what is going to drive municipal issuance next year).

So, now that I know there are so many variables that can go into the calculation of the estimated 2024 issuance amount, I decided to use the same methodology I used in a game to count the number of chocolates in a bottle at a recent baby shower. I waited until everyone that I could find put in their estimates and then took the average of all the estimates. (By the way: my answer of 269 chocolates was 7 over the actual number of 262 chocolates, 😂 but I did not win. 😕)

I currently have 13 investment banks’ estimates. Below is a summary of my analysis:

As always, please feel free to contact me directly if you have any additional thoughts I might have left out that you feel are relevant. 

Additional comments

Most of the estimates were analyzed during October through November, prior to the end-of-year market rally. Since then:

• In a December announcement, the Federal Reserve has signaled that it will cut interest rates three times in 2024, bringing the benchmark rate down to 4.6% by the end of the year.³ 

• Since the beginning of November, new issue municipal yield has been dropping making new issuance more attractive. As an example, since 11/1/2023, the AAA GO 10-year rate has dropped approximately 130 basis points (1.3%).

All of the above additional comments might have the estimators increase their predictions. 

Sources: 

¹ American Rescue Plan Act - National League of Cities (nlc.org)

² The Structure and Funding of the IIJA (acgadvocacy.com)

³ CBSNEWS.GO.com

Related Municipal Finance Reading

• Tender Offers: The Strategic Move in Bond Refunding
• Capital Financing Delay Tactics for Issuers Facing High Interest Rates
• DebtBook's Premium/Discount Amortization Methodology Explained

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