MSRB
Experts are looking to the past to predict the immediate future for what’s going to happen in the near-term muni market, maintaining a positive outlook despite an apparent threat to the tax exemption itself.
“New issue value was a record in 2024 at $508 billion,” said John Bagley, chief market structure officer, for the Municipal Securities Rulemaking Board. “The first time the market went over $500 billion in its history,”
The soaring numbers were part of the discussion at a webinar produced by the Council of Development Finance Agencies on Tuesday. The MSRB attributes the steady rise to several converging market factors that are expected to continue to play a role in 2025.
“I think part of it was depletion of the COVID-19 relief funds,” said Bagley. “Some municipalities still had some money left over. Some were able to use that and defer some of their financings.”
Issuers also retired old debt including Build America Bonds via extraordinary redemption provisions.
Swinging interest rates put the kibosh on taxable bonds as the trade volume of tax-exempt munis soared.
“In 2022 was the first time that MSRB received more than 12 million trades in a year,” said Bagley. ”In 2023 that number went over 13 million,” “In 2024 that number was up to 14 and a half million trades.”
The MSRB attributes some of the ballooning numbers to the combination of “separately managed accounts” combined with odd lot trading, which is made easier through electronic trading.
“About half of the volume of trades in 100,000 (lots) or less, which most people will identify as being odd lot trading, likely occurred from institutions and likely through separately managed accounts, said Bagley. If you went back ten years ago, that number was probably more like 10%.”
SMAs are defined as custom investment portfolios overseen by professional money managers, an arrangement that’s become more accessible to smaller investors.
Amidst all the good news there is cause for concern in the form of a
“As the incoming administration looks for revenue sources to fund their preferred programs and extension of some provisions of the Tax Cuts and Jobs Act, eliminating the tax exemption of municipal debt has surfaced as one possible revenue source,” wrote Chris Nicholl, the managing director and senior portfolio manager at Hilltop Securities.
The alarm bell started ringing last year but the threat became more real last week when the list appeared via a leak from the House Ways and Means Committee.
“This is a list of things that could be looked at. It’s not a list of things that are going to happen,” said Bagley. “There are 50 pages worth of things from all sorts of programs that are on the list.”
The list includes everything from reforming Obamacare subsidies which is projected to save $5 billion over ten years to repealing the cap on state and local income tax deductions that would theoretically save $1 trillion in ten-year savings as compared to the extending the TCJA.
Ending the tax exemption for munis is projected to save $250 billion over ten years, while ending tax preferences for private activity bonds, Build America Bonds, and other non-municipal bonds would result in $114 billion in 10-year savings.
In the short term for 2025 the MSRB is expecting more good news despite the threats. “I still think that we’re going to see another year of plus $500 billion, and some outliers could make that number even significantly higher,” said Bagley.
“I think the financing needs out there are large. I think the appetite to buy that stuff is there. So, it’s a good environment for issuers to come into. I would expect that we see potentially another record, or certainly one of the top four years we’ve ever seen in new issue value.”