Muni Bonds Near 2020 Record with 22 $1B+ Deals Amid Low Rates

Key Takeaway

• Muni bond sales of $1 billion+ hit 22 this year, on track to surpass the 2020 record of 26, fueled by lower rates and higher project costs.
• Large deals offer easier access for smaller firms and are driven by significant capital needs amid rising construction costs.
• Investors favor these larger, more liquid deals, reflecting confidence in municipal bonds despite their size.

Surge in Municipal Bond Sales

States and municipalities are seizing the opportunity to issue debt, with an explosive demand evident two years after the Federal Reserve initiated a series of 11 interest rate hikes. This year has seen a record pace of bond sales, with 22 transactions of $1 billion or more, nearing the annual record of 26 set in 2020. These large deals, which account for nearly a quarter of the year's $154 billion in long-term borrowing, are making it easier for smaller firms to access bond sales. The boom in municipal bond transactions is driven by lower borrowing costs and the prioritization of financing large projects, marking a significant return to activity after two years of reduced sales.

Lower Interest Rates Fuel Large Deals

The pace of large municipal bond sales has accelerated due to lower interest rates prevailing since November, when the Fed indicated the end of its latest hiking cycle. Top-rated municipal bonds maturing in 10 years are yielding 2.64%, a decrease from 3.64% in October. This environment has encouraged states and municipalities to address their multi-billion dollar borrowing needs, spurred by inflation driving up the cost of infrastructure projects. The Bureau of Labor Statistics reports a more than one-third increase in US producer prices of construction materials since late 2020, necessitating larger deal sizes to cover higher construction costs.

Illinois Capitalizes on Market Rally

Illinois has taken advantage of an improving credit grade and investors' hunger for yield amid a municipal market rally to speed up a $1.8 billion debt sale. The state sold $1.55 billion in tax-exempt bonds and $250 million in taxable debt for capital projects and an accelerated pension payment program, receiving over $12 billion in orders. This move, supported by nine credit rating upgrades in the last three years, reflects the strong demand for municipal bonds, with Illinois achieving some of the tightest credit spreads in recent history.

Record Debt Issuance Amid Rate Uncertainty

Globally, there has been a record issuance of debt, with companies issuing $53 billion in investment-grade bonds and nearly $11 billion in high-yield bonds in the US within just three days. This activity, the busiest period since 2021, is driven by strong investor demand and uncertainty about future funding costs. Issuers ranging from Hasbro Inc. to PNC Financial Services Group Inc. have taken advantage of this opportunity, with sectors positioned to handle a high-rate environment attracting significant investment. The mixed signals from global central banks on future interest rates, with some easing and others maintaining a more extended timeline for cuts, have prompted issuers to act swiftly to lock in funding before potential volatility.

Street Views

• JB Golden, Advisors Asset Management (Neutral on municipal bond market):

  "I’ve never seen deal sizes like this."

• John Miller, First Eagle Investments (Bullish on large issuers like Illinois, California and New York City):

  "In looking at the so-called mega deals so far this year, we are seeing the return to normal course of business for some larger issuers like Illinois, California and New York City... It is also likely that some of the larger issuers aren’t going to wait for the Fed to cut rates as that is a highly uncertain process."

• Walter St. Onge, Locke Lord (Neutral on municipal bond market):

  "The size of deals reflects the size of issuers’ capital programs, “and many large, frequent issuers now have multi-billion dollar borrowing needs."

• Chad Farrington, DWS Group (Neutral on reasons behind larger deal sizes in municipal bonds):

  "I would suspect the larger size of deals was driven by higher construction costs and the underlying funding needs in the various cases."

• John Flahive, BNY Mellon Wealth Management (Bullish on liquidity benefits from larger deals):

  "Larger deals tend to be more liquid in the secondary market, making them more attractive to broker-dealers."

• Jonathan Mondillo, Abrdn (Bullish on opportunities from large and liquid issues at elevated yields):

  "It’s an opportunity to add diversity from large and liquid issuers at still elevated and attractive yields."