Bonds

Municipalities relied less on interim financing in 2022, which triggered a 25.6% decline in short-term note issuance, resulting in historically low volume for the year, according to municipal sources.

Overall, short-term volume fell to $24.83 billion in 1,757 issues, compared to $33.35 billion in 1,944 issues in 2021, according to data from Refinitiv.

City, state, and local issuers experienced healthy coffers and continued revenue growth and collections in the year, and therefore, issued less one-year paper than the previous year, sources said.

“There was just not as much of a need for short-term debt in 2022 as a result,” said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities Inc.

Issuers in New York, California, and New Jersey sold the most short-term notes, with New York accounting for $6.82 billion, California issuers selling $3.76 billion, and New Jersey $3.67 billion.

Still, their issuance fell considerably from 2021, with New York issuance declining 43.2%; California dropping 45%; and New Jersey decreasing 9.2%, according to the data.

Federal COVID relief funds and increased tax collections after the shutdowns of early 2020 contributed to the declining short-term issuance, as did strong market technicals that led to less need for borrowing, sources said.

Generous support from the federal government following the pandemic shutdown led to less need, and COVID didn’t cause the economic deterioration expected, according to Sean Burgess, portfolio manager and fixed income analyst at Cumberland Advisors.

“Municipalities were flush with cash and didn’t have the same need to tap short-term funding as they did in 2021,” Burgess said.

Housing and transportation saw volume drop the most — by 91.4% and 71.2%, respectively.

Notes sold by housing issuers dropped to $55.7 million in six deals from $650.9 million from 11 transactions in 2021. Transportation issuers sold $1.24 billion in 40 deals, versus $4.31 billion in 40 deals in the previous year.

Declining note issuance throughout 2022 was influenced by a tighter Fed monetary policy, evolving economic conditions tied to inflationary pressure and recessionary fears, varied availability of stimulus resources, and overall municipal credit quality, according to Jeffrey Lipton, managing director of credit research at Oppenheimer Inc.

“These are the very reasons that contributed to a large drop in long-term muni volume last year,” he said.

Lipton said state and local governments benefited from multiple rounds of fiscal stimulus — much of which came from the American Rescue Plan Act — which provided operational support and filled the void left by revenue displacement during the heart of the pandemic. 

“Interestingly, certain municipalities have exhausted these funds while others are still sitting on excess stimulus cash,” he said. “With economic recovery in place during 2022, the federal dollars combined with generally improving revenue collections to strengthen a broad cross section of credits.

“Municipal governments found themselves in relatively good shape and so there was a reduced need to access the short-term market for cash flow needs as stronger budgetary performance closed the gap between revenues and expenditures,” Lipton said. 

While issuance was lower in 2022, concerns over higher rates may have motivated certain issuers to lock in more attractive long-term borrowing terms, according to Lipton.

“We also recognize that short-term borrowing needs do not take on a one-size fits all approach across geographic regions and sectors,” he continued. “Specific borrowing needs may reveal less reliance upon interest rate policy as a key decision maker,” Lipton said, noting that schools, for example, must be maintained, so capital financing plans would likely dictate the need for short-term borrowing. 

While overall volume fell, some sectors of the short-term market were outliers.

Environmental facilities and healthcare saw the biggest gains while most other sectors saw decreases.

Environmental facilities note issuance was $109.7 million in three deals, compared to $7.8 million in four deals in 2021; healthcare grew to $31.4 million in three deals from $2.4 million in two deals the year before.

Letter of credit supported notes were up 1,219% respectively, to $1.3 billion in five deals compared with $98.5 million in one deal in 2021.

Variable-rate demand obligations, or short-term puts, increased 279.6% to $1.52 billion in seven deals, compared with $400 million in two deals in 2021.

The overall market technicals in the short-term market were shaky for the VRDN sector last year, according to Rick White, an independent consultant who focuses on VRDOs. He is a former municipal bond trader at Wells Fargo Bank.

“I think there was just so much uncertainty in all the markets that there wasn’t much issuance, but if there were bonds issued they were mostly long-term, fixed-rate deals at ridiculously attractive yields for issuers,” he said.

Meanwhile, the SIFMA index, which tracks the weekly VRDN market, averaged 1.23% in 2022, up from 0.04% in 2021, which was attractive to money market funds, which are the largest buyers of VRDNs, according to White.

“So as rates rise, the yields in money market funds also go higher and make them more attractive,” White said, noting this added to demand for the VRDN product.

In addition, as yields on fixed-rate paper widened, it made the VRDN market a viable option for investors, White said.

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