Broker Check

Market News & Commentary - From The Desk Of David Loesch 12.02.2021

December 02, 2021
  • The State of IL priced a $400MM deal on Wednesday; it is the first of a string of deals coming to market over the next two weeks.  IL and other states have been able to get much improved spreads compared to a year ago during the pandemic. The deal was done competitively and priced at .17% for one year paper and .52% for 10-year paper with a 5.00% coupon. The longer end yielded 1.16% due in 2041 with a 3% coupon. A year ago, IL could not issue paper for less than 3.00%. IL was also the only state to borrow from the FED Reserves MUNI Facility last year and did it twice as the costs in the MUNI market surged. 
  • As with other states, IL and CA have seen a vast improvement in their financial outlook over the past year. Many states have a larger than expected surplus due to sales tax and property tax dollars coming in better than expected. IL and other states have received upgrades from the rating agencies because of this.
  • The two above bullet points result in a combination of increasing credit quality, supply/demand functions, and an overall strong appetite for MUNI paper due to tax rates moving up to pay for the stimulus. There will be a supply/demand mismatch for several months into 2022; many dealers are increasing their inventories because of this.
  • Many are also calling for junk paper to drive sales in 2022. This year, $425B MUNI's were issued, and some expect $500B for 2022. Dealers anticipate buyers will be "hungry" for yield, so they will issue junk paper to fund items not traditionally MUNI's. The previous financial crisis quashed the demand for junk paper; however, I suspect that junk will have strong issuance with the lack of yield in the marketplace. Junk issuance fell to $17B in 2015; however, in 2021, it rose to $35B. Many, including me, expect to see that total rise to $50B for 2022.
  • A recent study on Muni debt issuance for 2022 showed that most firms believe issuance to be on par with 2021. Sales forecasts collected from almost a dozen firms range from about $425B to $450B with a notable outlier of $550B from BOA, the market's largest underwriter. The 11 forecasts show MUNI issuance averaging $470B for next year, in line with 2021. States and local governments have sold about $422B in long-term debt this year plus another $20B corporates to date.



David Loesch

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