Collapse of taxable supply drags issuance volumes down in 1H22

Bonds

Throughout the first half of the year, supply has fallen below market participants’ expectations, with the drop in issuance being driven by rising interest rates that have stymied refunding and taxable volumes.

Continued market volatility, inflation hitting decade highs, and uncertainty over the Federal Reserve’s policy decisions kept issuers on the sidelines.

Total volume in the first half of the year was at $209.718 billion in 5,153 deals, down 11.2% from the $235.836 billion in 6,793 over the same period in 2021, according to Refinitiv data.

“Everyone is being exceptionally careful to not make any missteps. It’s only a half year, and we’ve got six months, but it’s a deep hole to come out of,” said Barclays strategist Clare Pickering. “And you’ve got a rate environment that’s extremely unpredictable right now.”

New-money issuance grew by 6.4% to $166.870 billion from $156.793 billion in 2021. Refundings were down 50.9% in the first half of the year to $26.677 billion from $54.368 billion in 2021, according to Refinitiv data.

Tax-exempt issuance fell 2.1% in the first six months to $167.162 billion from $170.759 billion in 2021. Taxable issuance dropped 44.7% in the first half of 2022 to $32.249 billion from $58.349 billion in 2021 over the same period, per Refinitiv data.

The first quarter saw $101.785 billion. The second quarter hit $107.633 billion. The first half of the year saw five of the six months — sans January — that had greater than $30 billion of issuance. Only March surpassed the $40 billion mark, according to Refinitiv data.

Bond insurance fell 6.5% in 1H22 to $17.617 billion covered in 840 issues from $18.832 billion in 1,175 deals in 1H21, per Refinitiv data.

Revenue bonds made up $131.064 billion in 2,039 issues, a 9.5% increase from 2021, and general obligation bonds dropped to $78.354 billion in 3,114 issues, a 13.9% decrease from 2021, according to Refinitiv data.

Issuers have paid close attention to the timing of their deals in order to avoid the wild swings in yields that have grown more frequent this year.

“Issuers tend to demonstrate pause when there’s outside market volatility,” said Jeff Lipton, managing director of credit research at Oppenheimer Inc. “So when you have these runaway inflationary numbers and a very aggressive Federal Reserve tightening sequence that tends to result in issuer pause.”

The Federal Open Market Committee hiked rates 75 basis points back-to-back at its June and July meetings after exceedingly high inflationary prints. Market participants believe the FOMC will hike rates at least 50 basis points at its next meeting in September, with some believing a 75 basis point rate hike is most likely.

Many market participants have revised their supply predictions for the year downward as a result of supply not meeting expectations.

Most firms at the end of last year estimated that total issuance for the year would range between $390 billion and $550 billion, basing their predictions on various factors, such as the new infrastructure law, interest rate expectations and monetary policy, global economic recovery and future tax policy.

Few predicted Russia would invade Ukraine, adding another major macroeconomic concern to the mix, which aside from humanitarian costs, has amplified supply-chain problems, raising fossil fuel costs and inflation around the globe.

Therefore, Lipton’s initial forecast of $450 billion to $460 billion has been revised to resemble something closer to $400 billion at the end of June.

BofA Securities Yingchen Li and Ian Rogow revised their expectations in mid-June downward by $50 billion less than the $550 billion assumption they made at the end of 2021. Tom Kozlik, head of strategy and credit at HilltopSecurities, predicted total volume for 2022 to be $495 billion, and later revised total issuance to be between $400 billion and $450 million at the end of April. 

Similarly, Pat Luby, senior municipal strategist at CreditSights, revised his predictions down from $480 billion to $410 billion in a report published in mid-June.

Citigroup Global Markets moved their estimates down from $550 billion at the end of 2021 to $500 billion, led by taxables.

Not everyone has revised their predictions.

Going into 2022, Pickering and fellow Barclays strategists Mikhail Foux and Mayer Patel predicted total issuance would be $430 billion to $450 billion. However, they do think issuance will be on the lower end of their projections at the end of June.

Even with the possibility of supply picking up in the second half, Lipton said, “It’s very obvious and very intuitive that 2022 will not be a record issuance.”

Issuance in 2020 and 2021 was heavily influenced by a wave of taxable supply, which was supply tied to advance refunding of outstanding tax-exempt debt after the Tax Cuts and Job Acts effectively eliminated the ability to market tax-exempt advanced refunding bonds. Then the Build Back Better legislation never came to fruition.

Moreover, “rising interest rates have stifled both new-money and refunding issuance. The market volatility is largely tied to monetary policy uncertainty, as well as unsettling macro and geopolitical concerns,” Lipton said. “Taken together, this has kept many issuers on the sidelines … and has effectively resulted in lower issuance.”

California was the biggest state issuer in the first half of the year once again, per Refinitiv data.

All issuers in the Golden State accounted for $27.130 billion. New York was second with $25.181 billion, Texas was third with $24.331 billion, Florida followed in fourth with $9.309 billion and Michigan rounded out the top five with $7.177 billion.

The rest of the top 10 were: Virginia with $7.147 billion, Illinois is next with $6.210 billion, followed by Pennsylvania at $5.500 billion, then Georgia with $5.484 billion and Louisiana with $5.354 billion.

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