The municipal bond market is setting up for something it hasn’t seen in a few years: a busy January for borrowing.

January is typically the slowest month in terms of new muni bond sales, averaging $25 billion over the past decade, according to Bloomberg LEAG data. But a lighter-than-average December sales calendar, coupled with an interest rate decline of more than a percentage point in recent months, sets the stage for an uptick in issuance this time around.

Long-term bond sales totaled $22.3 billion in December. That’s above the $15.3 billion sold in December of 2022, but still well below the decade-average for the month of $29 billion. A slower December usually leads to a busier January.

“I expect January issuance to pick up compared to a sleepy December,” said Nisha Patel of Parametric Portfolio Associates LLC. “Especially given that rates have come down significantly. Issuers may want to take advantage of an environment where not only are financing costs cheaper but demand is expected to be high as well due to reinvestment flows.”

Maturing bonds total $20.5 billion in January, with scheduled calls totaling $2.7 billion, meaning investors will be looking to put more than $23 billion back to work.   

Several high-profile issuers have already scheduled big sales for the month. Jefferson County, Alabama, is selling $2.5 billion in refunding revenue warrants next week, and the Conroe Independent School District in Texas is selling a $568 million issue of revenue bonds. The state of Washington plans to take bids on $948.4 million of general obligation bonds on Jan. 23.

Municipal bond sales in 2023 lagged 2022 issuance for most of the year, until sentiment for interest-rate cuts by the Federal Reserve took hold in the fall. This led to an explosive rally in the entire fixed-income market. Since Nov. 1, the yield on the 10-year AAA BVAL index dropped by more than 130 basis points, and returns, which had been negative in August, September and October, turned positive. For the year, municipals returned 6.4%, the best since 2019’s 7.54%. Long-term issuance for the year totaled $362.6 billion, up 0.4% from 2022.

Not everyone is convinced that muni sales will pop in January. Tom Kozlik, managing director and head of public policy and municipal strategy at Hilltop Securities, says he expects issuance to total around $20 billion, considering how high sales were in the last quarter. In addition to the lighter-than-normal December, October sales totaled nearly $40 billion, November more than $35 billion.

“I also could see a situation where issuers increase attention to capital markets as a result of lower rates, so I also see an argument for a January with slightly more than $20 billion,” Kozlik said in an email.  

This article was provided by Bloomberg News.