As long as investment demand for municipal bonds hold steady, munis-related exchange traded funds could maintain their momentum, with supply of new issuance expected to decline into 2017.
Tom Kozlik, director of municipal credit analysis at Janney, expects that the primary market issuance will be around $250 to $275 billion this year. So far this year, states and localities have sold $95.2 billion in long-term, fixed-rate debt, about 23% less than what the amount issued for the same period year-over-year.
The rate of growth for outstanding U.S. state debt in 2013 slowed for a fourth consecutive year and was the lowest growth in debt for the past 20 years, according to Moody’s Investors Service.
“The continued slowdown in the growth of net tax-supported debt primarily reflects a new conservative attitude toward debt among the states,” Kimberly Lyons, a Moody’s Assistant Vice President and Analyst, said in a research note. “Growing spending pressures coupled with inconsistent revenue growth and uncertainty over future revenue trends have forced states to take a cautious approach when considering the addition of new debt service costs to their budgets.”
New issuance could steadily decrease due to six factors, including higher interest rates, use of alternative debt products, austerity measures, less flexibility in spending, political and voter attitudes, and lack of public policy support for infrastructure spending.
“A higher interest rate environment and our other qualitative factors will help keep new money issuance closer to pre-2000 levels,” Kozlik said in the Janney report.