Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
As investors and their advisors plan for the New Year, keeping an eye on how the municipal bond calendar will influence new issues and investing opportunities is wise advice. With the U.S. municipal bond market expected to remain robust in 2019, investors and their advisors need to watch the calendar for new issues that best meet their specific financial goals and investment strategies.
I’ll discuss some of the ways advisors can benefit from following the new-issue calendar, but first let’s take a look at the overall dynamics in the muni bond market.
A vast muni bond market
The U.S. municipal bond market has more than 50,000 state and local government issuers that make up a total outstanding principal amount of approximately $3.8 trillion in tax-exempt debt. About two-thirds of this debt is owned by individuals either in their names or through mutual funds, money market funds, closed-end funds or exchange-traded funds (ETFs), enabling individual taxpayers to take advantage of the preferential IRS and state treatment of tax-exempt municipal bond interest.
This year, state and local government issuers will have minted almost $400 billion in municipal bonds in 2018. This is about 10% less than 2017, when the Tax Cuts and Jobs Act was being crafted. Tax reform eliminated advance refundings, which were a common cost-saving tool for state and local governments. Consequently, state and local governments accelerated sales of their new issues and advance refundings in the fourth quarter of 2017 in anticipation of the legislated elimination of advance refundings, which became effective January 1, 2018.
About 10,000 new municipal issues will have entered the market by year-end 2018. The new-issue market is expected to stay active in 2019 as state and local infrastructure needs, including transportation, hospitals, schools, clean water, clean air, water, parks, ports, airports, and affordable housing, must be met to accommodate growth and public infrastructure renewal.
Heading into 2019, advisors watching competitive and negotiated new-issue calendars have an eye on growth trends in the economy. State and local government infrastructure investments act as a compass pointing to where private investments trend.
How to spot and track new-issue opportunities
Buying bonds at new-issue gives advisors and their clients access to the best-priced investments. This is because issuers are working with investment banking financing teams to keep costs in check. Whether the bonds are sold by the issuer via a competitive or negotiated sale, the issuer has a vested interest to work with the financing team to make sure the coupons and yields are competitive at the time of the initial offering. Advisors and their clients have benefit from the collaboration between the issuer and the financing team that ensures that the interests of the issuer, advisor and investor are aligned.
In preparation for a new issue, issuers and their counsels will draft investor disclosures (also known as a “Preliminary Official Statement,” or ”Official Statement”) based on the most recently available information about the project, the community, its economy, and how the debt will be paid back. While state and local government issuers have been responsible for preparing annual “continuing disclosure” since 1995, initial-issuance disclosure contains the most current information relative to the new-issue date. Continuing disclosure, while important for keeping the market generally informed of the issuer’s financial condition, may not be as specific, thorough or as timely as new-issue data prepared for an Official Statement.
Once an issue has gone through its initial underwriting, bonds are assigned a CUSIP and become a line item in a lengthy list of investments that make up a portfolio. When bonds are offered in the secondary market, information about the credit may not be as specific or as fresh as it was when the bonds were sold at initial issuance.
Advisors keeping track of the new-issue calendar can spot new offerings that may be of interest to clients by location, purpose or structure. At new issue, the underwriting syndicate’s sales force is informed and can give detailed information on how the investment can fit investor goals for supporting a local economy or project. This can be especially important for investors with environmental, social or governance (ESG) investment objectives. Many municipal bonds serve public governance and financing purposes for schools, parks, clean water, clean air, and affordable housing, efficiently satisfying investors with ESG strategies.
In addition, the municipal market is following the corporate market and more frequently offering “green bonds,” which are tied to climate-change initiatives. Being poised to put an order in for new-issue green bonds early during the order period puts advisors and their investor clients in the best position to have orders filled.
Identifying taxable debt opportunities
Increasingly, state and local governments are taking advantage of market conditions to sell taxable debt. In these instances, advisors can work with clients to consider whether or not the structure is a fit for retirement portfolios that are either tax-deferred or tax-free (Roth).
Because new-issue taxable municipals are not that common, keeping track of the forward calendar for new issues allows advisors to spot opportunities as they are scheduled for market.
Issues change with the seasons
New issuance is seasonal. U.S. state and local governments and schools operate on a fiscal year beginning July 1 and ending June 30. Bond issue preparation gets folded into the state and local government calendar along with annual budgets, tax and revenue collections, and building seasons.
Bond payment dates also influence market conditions, as January 1, March 1, July 1, and September 1 are all popular principal and interest payment dates. As bond interest and principal maturities get paid, money gets circulated back into demand for additional municipal bonds. Finally, as we saw in 2017, the new-issuance calendar can also be influenced by legislative changes, both proposed and enacted.
Tom Lockard is managing director and head of investment banking at 280 CapMarkets, a firm that provides access to the bond market for financial advisors.
Read more articles by Tom Lockard
