(Bloomberg) -- Municipal bond sales are surging at the fastest clip in weeks as issuers focus on the prospect of lower borrowing costs amid growing expectations that the Federal Reserve will start cutting interest rates as soon as September.
US states and local governments are expected to sell $16.1 billion of debt over the next 30 days, a number that represents a fraction of what may actually come to market because deals are typically announced with less than a month’s notice. That figure, which sums the forward-looking calendar, shows the quickest pace of new offerings since early June and roughly 68% more than the 12-month average, according to data compiled by Bloomberg.
The supply uptick is a result of a slew of factors, including cities’ need to finance new infrastructure and a higher cost of construction for projects, said Matthew Caggiano, co-head of municipal bond strategy at DWS Investment Management. Issuers have also been rushing to refinance Build America Bonds with tax-exempt debt, which has boosted new deals.
Muni-bond sales have already jumped this year. Borrowers have issued $246 billion of long-term debt in 2024, a 36% increase from the same period a year ago, data compiled by Bloomberg shows.
“With issuers either finally bringing delayed new bond issues or accelerating future bond issues to get in front of potential election-related uncertainty, first-half issuance was strong,” strategists at Municipal Market Analytics wrote in a research note dated Monday.
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So far, the market has largely been able to absorb the increase in supply. Munis have earned 0.22% this year, around the same return as Treasuries, Bloomberg index data show. Investors added about $775 million to muni funds in the week ended July 10, according to LSEG Lipper Global Fund Flows data.
Chris Brigati, director of strategic planning at SWBC, expects the new sales to be well received, pointing specifically to a deal by Detroit, which priced about $46 million of bonds on Tuesday.
“Buyers are looking for reason and opportunity to seek additional yield when they’re purchasing paper right now,” he said.
A 10-year bond in that issue priced with a 5% coupon and a roughly 3.5% yield, or about 70 basis points over the benchmark, pricing data compiled by Bloomberg shows.
That pricing is more than 100 basis points tighter than bonds the city sold about a year ago, according to Detroit’s chief financial officer Jay Rising.
“The rates received on the bond sale allow the City to significantly lower costs over what they would have been before our credit rating upgrade,” he said in an emailed statement. Detroit’s credit rating was bumped back into investment grade territory earlier this year by both Moody’s Ratings and S&P Global Ratings.
Walker McQuage, co-head of muni syndicate at Wells Fargo which underwrote the deal, said that demand for BBB-rated bonds is “off the charts” as evidenced by the Detroit issuance as well as a sale the bank managed on Tuesday for the Guam Power Authority.
That $55 million transaction received more than $500 million of orders and “priced at or near the lowest spreads we’ve seen on a new-issue transaction from any Guam issuer or enterprise,” McQuage said.
--With assistance from Maggie Eastland.
(Updates story with comments from Detroit city official and head of Wells Fargo’s muni syndicate.)
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