Muni Bond Issuers Hedging Ahead of Tax Law

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

As uncertainty continues to surround the ever-changing tax overhaul plan, municipal bond issuers aren’t taking any chances: They’re conducting a gusher of bond sales at a pace not seen in more than 30 years.

Issuance this week is expected to total almost $12 billion, according to Thomson Reuters, following two weeks that each saw $20 billion in sales.

At the current rate, state and local governments are on track to easily exceed the monthly record of $54.7 billion in bond sales reached in 1985.

Muni Bond Issuers Hedging Ahead of Tax Law

Effects of tax plan on munis remain in flux

How a final tax bill will look – and whether it’s ultimately approved by Congress and signed by the president – is anyone’s guess.

Although the House version of the bill eliminated the exemption on private activity bonds, which fund projects such as hospitals, affordable housing and charter schools, lawmakers late last week agreed to maintain the exemption, though it’s unknown at this point whether any limits will be placed on them.

Further, the proposal to eliminate advance refundings remains in the bill. Advance refundings, which enable issuers to refinance debt, total tens of billions of dollars each year.

Motivated muni issuers, investors

As we discussed (“Looming Tax Law Fuels Municipal Bond Rush”), evolving provisions of the bill have motivated both buyers and sellers.

Of the $434.2 billion in muni bonds and notes issued from the beginning of the year until late last week, issuance in November and so far in December accounts for an outsized 20% of the total, according to Reuters.

As fast as bonds are brought to market, investors are snapping them up. Fearing a diminished supply of bonds as a result of the tax changes, investors’ voracity earlier this month fueled the biggest rally in prices since 2011.

Analysts say the total supply of munis in 2018 could drop by 25% as issuers pull back after the rush to market this year and a drop in advance refundings.

If you’re uncertain how the tax plan will affect the municipal bond market, you’re in good company.

While the bill remains in flux, both issuers and investors are opting for the prudent path as they stay ahead of what could be seismic changes in the municipal bond market.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Dec 19, 2017

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