Outlook 2024: Participants grow more bullish on bond volume

Bonds

The direction of interest rates will have the greatest impact on the municipal bond market this year, according to a vote taken at The Bond Buyer’s 2024 National Outlook Conference in Manhattan on Thursday.

Almost three quarters of respondents, 72%, said interest rates would have the most significant effect on the public finance industry in 2024, with 17% citing the federal elections and 5% each saying inflation or the regulatory environment would be the main factor.

Fifty-nine percent of those polled also said they expect the Federal Reserve to cut rates by the end of the second quarter while 38% see a rate cut by the end of the third quarter with 3% saying it was still too early to tell if and when the Fed would lower rates.

Arlene Bohner, head of Fitch Rating’s U.S. public finance department, moderated the panel. Joining the discussion of the poll results were Rick Kolman, managing director and head of municipals at Academy Securities, Tom Kozlik, head of public policy and municipal strategy at HilltopSecurities, Chris Valentino, managing director at Stifel, and Patrick Landers, Treasurer of the Massachusetts Bay Transportation Authority. Many of the responses to the poll questions were similar to The Bond Buyer’s Predictions survey conducted later last year.

Arlene Bohner, head of Fitch Rating’s U.S. public finance department, moderated the Live Market Survey panel.

While annual muni issuance slipped to $380 billion last year, 64% of respondents said supply this year will increase moderately to between $400 billion and $450 billion with 20% saying issuance will be about the same as in 2023 and 15% felt volume will increase significantly this year and surpass $450 billion. Only 2% said volume would fall again this year.

“I revised my forecast a couple of weeks ago,” Kozlik said, adding, “It’s common for me to revise my forecast, but it’s not common for me to revise the forecast as early as I did.”

Kozlik revised his volume forecast for 2024 to $420 billion from $330 billion, “so it’s very much in line with what folks are thinking.”

Valentino agreed issuance would rise this year, saying, “now we’re in a more issuer-friendly environment and there’s not quite as much upward pressure on rates. It’s pretty encouraging to think that at the very least we’ll be ahead of last year — maybe not over $450 billion, but comfortably over $400 billion.”

However, Kolman said, while he has been getting a lot of inquiries about taxable munis he doesn’t foresee a large uptick in taxable issuance in 2024.

“The number you are hearing [$400 billion and $450 billion] would be largely tax-exempt debt,” he said.

Refunding volume rose to almost $51 billion in 2023 and attendees were asked what they anticipated refunding levels to be in 2024. Fifty-two percent expect an increase this year while 32% see it at the same level as last year and 16% see it declining.

“From my standpoint, there’s nowhere to go but up as far as that volume goes,” said Valentino. “I think there’s a lot of current callable bonds that were not refunded last year that are still eligible to be refunded, assuming a more accommodative rate environment this year. I think it’s a pretty safe bet that we will be higher than we were last year.”

Attendees at the panel discussion sponsored by Fitch, were split when asked how they anticipate the industry will adjust to UBS’ exit from negotiated underwriting and Citigroup’s exit from the muni business.

Forty-six percent said they expected no major interruptions because business will be picked up by other bulge-bracket, regional and middle-market firms, 8% said the industry has faced businesses exiting in the past and will rebound, 2% said there may be secondary market liquidity challenges in the short term while 45% cited all of those.

Respondents were decidedly pessimistic when it came to the political battles surrounding environmental, social and governance issues.

Forty-seven percent saw no end to the fights over ESG and said it was very frustrating, 46% viewed it negatively, saying the political bickering will make it harder on issuers, while 7% had a positive take on it, believing it would force the industry to move faster toward standardizing some guidelines on ESG criteria.

Turing to credit quality, 53% of the respondents said the macroeconomic environment would have the greatest impact on issuer credit in 2024 while 23% said it would be higher costs, 15% said it would be federal policy and 7% said it would be climate change or weather events and 3% said it would be cybersecurity threats.

“We’re just stepping off of three levels of federal support,” Landers said. “We had tremendous need because of the pandemic. So we’re now standing on a ground that really hasn’t firmed up under our feet. And now we do have higher costs because of inflation — the largest part of that being labor costs.”

Municipal bond mutual funds saw outflows in 2022 and 2023 and 43% of the respondents polled said they expect funds to continue to see outflows while 32% said inflows would rebound and 25% said it was too early to tell yet.

Other questions posed to attendees were on Basel III bank regulations and whether the U.S. will enter a recession in 2024.

Fifty-six percent said Basel III will have a minimal impact, 39% said a major impact and 5% said no impact.

Fifty-six percent don’t expect a significant slowdown or recession, 19% see a slowdown or recession by the second half of the year, 16% said the U.S. is already in a slowdown and 9% see a recession in the first half.

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