Roller Coaster Quarter For Muni Issuance

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

Municipal bond issuance jumped more than 50% in the second quarter of 2018, while investors’ appetite for munis was strong, according to the Securities Industry and Financial Markets Association.

State and local governments issued $94.1 billion in municipal bonds in the second quarter, compared with $61.8 billion in the previous quarter.

“Second-quarter issuance recovered from the anemic pace of the first quarter,” Michael Decker, of SIFMA, told the Bond Buyer. “Also, total returns in the municipal market were generally positive for the quarter, while some other sectors like high-grade corporate bonds generated negative returns during the period, indicating continued strong demand for municipals.”

Roller Coaster Quarter for Muni Issuance

Muni issuance supply fueled by bump in revenue

SIFMA attributed the increase in muni issuance to higher revenue by state and local governments, a byproduct of the tax overhaul. The law, known as the Tax Cuts and Jobs Act, prompted wealthy people to take advantage of tax breaks before they ended last year.

“The TCJA prompted a spike in tax payments and property tax prepayments as high-income taxpayers sought to take advantage of expiring tax breaks,” the report said.

Other factors boosting revenue included a stabilized commodities market, which affected states dependent on oil and minerals, and a strong equities market, which resulted in greater capital gains. Also, a December 2017 deadline for hedge fund managers to repatriate accumulated offshore gains increased estimated payments.

Overall, muni issuance is down, as expected. Second quarter issuance dropped $6 billion from the same period last year, while year-to-date issuance in 2018, $155.9 billion, is below the 10-year average of $179 billion.

What to make of the numbers?

As we’ve said, debate over the tax overhaul late last year, including threats to municipal bonds, was bound to reverberate in the muni market (“Looming Tax Law Fuels Municipal Bond Rush”).

Market-wide gyrations provide fodder for the financial press, and as professionals in the business, we follow them closely.

But they’re not top-of-mind to long-time investors. They focus on the specific attributes of bonds – quality first, then yield – and aren’t distracted by news that’s beyond their control and has little relevance to their portfolio. And they keep their interest clock ticking.

Our successful municipal bond clients know they’ll find the bonds they want, and get the help they need, regardless of the headlines.

James A. Klotz is the President of FMSbonds, Inc.
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Aug 20, 2018

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