We expect the taxable municipal market to remain a key financing vehicle for U.S. municipal issuers in 2022 and beyond.

The last three years have ushered in a new era of municipal financing, with taxable munis producing record issuance not seen since the $241 billion issued over 2009 and 2010 with the assistance of the Build America Bond program. As a result, the taxable muni market grew by 20% in 2020 alone. We believe taxable muni supply could exceed $100 billion again in 2022 and total 25% of expected new issue supply. New money supply is expected to be higher, whereas debt used to “advance refund” tax-exempt munis by issuing taxable munis may decline slightly year-over-year.

The $100 billion issuance mark has great significance as to the perceived longevity of taxable munis. Prior to 2019, issuance averaged $25 – 50 billion annually. As the pace of issuance has increased, taxable muni liquidity has improved. Secondary market trading activity increased 71% from 2015 to 20201.

The first quarter of 2022 should set a strong pace for annual issuance as many issuers took a wait-and-see approach in the second half of 2021 while legislative negotiations were underway. However, it appears that infrastructure legislation will be neutral for the muni market. The bill passed by the House of Representatives in November excludes municipal bond-friendly provisions. It’s unlikely that Senate Democrats will include these provisions in their version of the bill.

With more clarity, December has experienced increased taxable muni issuance as issuers have proceeded with their refinancing plans. Refinancing tax-exempt debt in the taxable market allows municipal issuers to reduce their borrowing costs and utilize the current low-yield environment. In our view, this should persist in early 2022.

Looking forward, we believe issuance could experience a more sustained level of around $100 billion beyond 2022. Nearly $300 billion of municipal bonds are callable in 2023 and 2024 and would be eligible for taxable refunding. Issuance related to new purposes could also prove promising as federal stimulus measures passed in 2020 and 2021 should help fund some infrastructure projects. Not all of these projects would be able to solely rely on tax-exempt funding, which could help the taxable municipal market’s evolution.

Based on our outlook for new money issuance and refunding pace, we believe elevated levels of supply will continue in the near term. In our view, the asset class continues to serve as a scalable investment solution for international and domestic investors seeking diversification through quality assets with attractive risk-adjusted yields. We encourage investors to continue to consider adding taxable municipals to their portfolios.

For more on this topic, read our Taxable Munis flyer and Taxable Munis Deserve Attention blog.


1Source: MSRB