Note Sales Get Summer Boost

The short-term municipal bond market is set to see a summer revival as state and local governments grapple with uncertainty from recession fears and rising interest rates.

Municipalities have been awash with cash, thanks to higher-than-expected tax revenues and federal stimulus money, which has kept them from issuing short-term debt. Sales of municipal bonds due within 18 months are at $5.1 billion so far this year, down 41% from the same period last year and the lowest total since at least 2013, according to data compiled by Bloomberg.

Governments tend to sell more short-term notes in the summer, which coincides with the end of the fiscal year, as they await tax collections. The need to raise capital quickly to fund infrastructure projects is also prompting some state and local governments to ponder issuing near-term debt. And this year, uncertainty around interest rates has made selling these short-term notes more attractive to some issuers, said Jeff Lipton, head of municipal credit and market strategy at Oppenheimer & Co.

“At the end of last year, the short-term data was less about cash flow borrowing and more about bond anticipation,” he said. “Concerns over higher rates may motivate issuers to lock in more attractive borrowing terms.”

Los Angeles County plans to sell $900 million in tax and revenue anticipation notes on June 7, even as it projects property values to rise by $100 billion this year, which is expected to result in $18 billion in additional tax revenue. The county is raising money to tide it over until the tax revenue comes in, said Daniel Wiles, assistant treasurer for the county.

It sold $1 billion last year during its annual note sale and $1.2 billion the year prior, he added.

Many New York school districts aim to go ahead with planned note sales, according to John Farawell, head muni trader at Roosevelt & Cross. Even Texas, which canceled its tax and revenue anticipation notes last year for the third time in three decades, is mulling over whether it’ll go forward with a deal in the coming weeks, according to a spokesperson for the state comptroller’s office.

“Even with the care package and even with positive tax collections there’s still the same demand for notes,” Farawell said. “The infrastructure needs haven’t changed. Schools still need to be upkept. The local municipalities still need to repair roads and bridges.”

Even with a summer bump, total note sales aren’t expected to surpass their 2019 and 2020 levels. There’s simply less need, Oppenheimer’s Lipton said.

“Municipal governments are in relatively good shape,” he said. “By that standard alone there’s a reduced need to access the short-term market.”