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Muni Watch: The Outlook for Municipal Bond Issues in 2016

What should we expect for the municipal bond market in 2016? The Securities Industry and Financial Markets Association (SIFMA) posed that question to ten of the nation’s top bond underwriters and dealers to get a sense of what we should expect.

According to the SIFMA 2016 Municipal Issuance Survey published in December, experts anticipate muni market issuance will be roughly in line with last year’s activity. According to the survey, the consensus is that total muni issuance should hit $432 billion in 2016, compared with the estimated $429 billion in muni issuance last year.

Of the $432 billion in total anticipated issuance, experts estimate that $389 billion will be long-term issues, with short-term issues making up the remaining $43 billion.

“While we expect issuance to remain largely flat in 2016, investor demand for new bonds will continue to be robust, and borrowing conditions for state and local issuers will remain attractive,” said SIFMA Managing Director Michael Decker, who also serves as co-head of the Municipal Securities division.

What critical factors related to the muni market are the experts watching in 2016? Interest rate increases and credit quality are key factors. The move by the Federal Reserve’s Federal Open Market Committee to raise the federal funds target rate in December marked the first interest rate hike in nearly a decade. The SIFMA survey found that muni market watchers expect the federal funds rate to be lifted to 1% by the end of this year.

Why keep track of muni bond issues? First, debt issuance from state and local governments and agencies can offer a window into the overall economic outlook. Rising volumes may reflect a greater ability among state and local governments to fund critical projects like roads and bridges, hospitals, water systems, and other high-value infrastructure needs. Such issuance, which connects investors with investment-worthy projects, can create jobs and drive economic growth.

Another reason to pay attention to munis is that the bonds are a popular investment product for investors who like their generally steady returns and tax advantages that many such bonds provide. Changes in the availability of new muni bonds may affect investors’ returns and investing strategies.

Also in December, SIFMA’s Economic Advisory Roundtable published its annual year-end economic outlook survey, based upon responses from economists at leading financial institutions. That survey suggested investors can expect the economic recovery to continue at a “slow and steady” rate, with a solid 2.5% growth rate in the U.S. economy in 2016. That report can be found here.

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