(Bloomberg) -- States and municipalities are demonstrating an explosive demand for debt two years after the Fed first suppressed bond sales with a series of 11 interest rate increases. 

Nowhere is this more evident than in the number of bond sales of $1 billion or more, long a rarity in municipals. There have been 22 so far this year, putting the market on pace to smash the previous annual record of 26 set in all of 2020, according to data compiled by Bloomberg. Those deals account for almost one-quarter of the year’s $154 billion in long-term borrowing.

“I’ve never seen deal sizes like this,” said JB Golden, portfolio manager for Advisors Asset Management. He said the large deals make it easier for smaller firms to get access to bond sales, a welcome development. 

The boom in very large municipal-bond transactions has been sparked by lower borrowing costs and governments prioritizing the financing of large projects, marking a return to business after two slack years. In 2019, 2020, and 2021, states and municipalities borrowed more than $400 billion, while in 2022 and 2023, new sales shrank to just north of $360 billion, according to data compiled by Bloomberg. 

“In looking at the so-called mega deals so far this year, we are seeing the return to normal course of business for some larger issuers like Illinois, California and New York City,” John Miller, head and chief investment officer of the high-yield muni credit team at First Eagle Investments, said in an email. “It is also likely that some of the larger issuers aren’t going to wait for the Fed to cut rates as that is a highly uncertain process.”

The faster pace of the large sales may be ascribed to the lower interest rates that have prevailed since November, when the Fed signaled that the latest hiking cycle was finished. Top-rated municipal bonds maturing in 10 years are yielding 2.64%, down one percentage point from October. 

“The size of deals reflects the size of issuers’ capital programs, “and many large, frequent issuers now have multi-billion dollar borrowing needs,” said Walter St. Onge, a partner at Locke Lord, who focuses on public finance. 

Inflation has also made infrastructure projects more expensive. A measure of US producer prices of construction materials has increased by more than one-third since late 2020, according to data from the Bureau of Labor Statistics.

“I would suspect the larger size of deals was driven by higher construction costs and the underlying funding needs in the various cases,” Chad Farrington, co-head of municipal strategy at DWS Group, said in an email.

The urge to go big is also influenced by investors preferences. Larger deals tend to be more liquid in the secondary market, making them more attractive to broker-dealers, according to John Flahive, head of fixed income at BNY Mellon Wealth Management. 

The transactions have been “easily digested” by the market despite their size, said Jonathan Mondillo, head of North American fixed income at Abrdn. “It’s an opportunity to add diversity from large and liquid issuers at still elevated and attractive yields.”

--With assistance from Maxwell Adler and Amanda Albright.

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