(Bloomberg) -- US states and local governments, undeterred by high interest rates, have propelled the municipal bond market to the busiest start to a year since at least 2013.

Muni-bond sales have hit $183 billion so far in 2024, up 37% year-over-year, according to data compiled by Bloomberg. The haul so far this year is about $50 billion higher than the same period in 2023, the figures show. 

Government debt sales have remained light in recent years as cities avoided bond sales because they could lean on pandemic relief aid instead of selling bonds. The uptick in activity is a welcome reprieve for bankers, who had seen dealmaking slump since 2022.

“We were artificially low in rates and artificially low in issuance over the past few years,” said Elaine Brennan, executive vice president of public finance at Roosevelt & Cross, a municipal underwriting firm. “I’m not surprised or shocked that the issuance is growing this year even with no Fed intervention yet.”

The surge in bond sales has pressured performance in the muni market. Top-rated yields jumped more than 30 basis points last week, the steepest weekly climb since March 2020, when the onset of the pandemic roiled financial markets. The 10-year benchmark stands at near 3%, above the average of about 2% since 2011, according to Bloomberg BVAL. 

‘Timing’ Question

Federal Reserve Chair Jerome Powell and other central bank officials have stressed the need for more evidence that inflation is on a sustained path to their 2% goal before cutting the benchmark interest rate, which has been at a two-decade high since July.

Brennan, for her part, says she suspects that rate cuts will be very gradual and from a banker’s perspective, it’s not worth it for municipalities to wait for the Fed to cut interest rates.

Patricia Song, finance director for Garden Grove, California, said the city came to market in May with a bond sale because the municipality needed to finance a new public safety building, among other projects. 

“If I need the money this year, then I can’t wait until two years later to issue the bonds,” Song said. “It’s really the capital need that drives the timing of going to the market.”

Craig Brandon, co-head of municipals at Morgan Stanley Investment Management, said governments typically sell bonds to fund capital projects and don’t try to time interest rates. Issuance has stayed light over the past few years due to the Covid relief aid.

“For the past couple years we’ve been saying at some point in time, issuers have got to come back to the market,” Brandon said. “We’ve just got to the point where they need to start raising capital again and issuing bonds. A lot of what you’re seeing now is a catch up from the last few years of very low issuance.”

University Deals

Colleges are among the governments tapping the muni market for financing in large numbers. Trinity University, a college in San Antonio, came to the market with a $67 million bond sale this month to build an event space and welcome center for prospective students and visiting alumni. The college is also using the funds to renovate dorms.

Gary Logan, vice president of finance and administration for Trinity, said the college “felt some urgency” to complete the sale because the projects are a key part of the school’s strategic plan. He said the school did keep an eye on interest rates and is happy with how the sale turned out. Tax-exempt debt due in 2034 priced to yield 3.13%.

“The relatively resilient US economy, higher inflation, and higher-for-longer language from the Federal Reserve, encouraged us to go to market now, rather than waiting into the summer or fall time frame,” he said in an email. 

(Correct’s Craig Brandon’s firm name in tenth paragraph)

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