Municipal-bond bankers have been extra busy this year as state and local governments rush to borrow at a record pace to fund projects.
State and local governments have sold $153 billion of new debt in the second quarter, already the biggest ever with just four trading days left in the period, according to data compiled by Bloomberg. That has lifted 2025 sales to more than $271 billion, a 21% increase over last year’s volume.
That tempo is likely to become a new normal as construction costs soar and borrowers burn through their pandemic-era stimulus funds, according to Barclays Plc. The strategists, including Mikhail Foux and Grace Cen, said the market could reach $5 trillion within the next few years – up from around $4 trillion currently.
“After a long period of rather subdued issuance, we believe munis have shifted to a new paradigm of heavy supply,” Foux and Cen wrote in a research note published Tuesday. The analysts have also increased their supply projection for 2025 by 10% to as much as $540 billion.
A number of factors are driving the supply surge. Infrastructure projects are more expensive, meaning governments have to sell more bonds to fund them. Additionally, interest rates are likely to remain steady in the short-term so issuers who have been waiting for some relief from higher borrowing costs may eventually have to come to market.
Future federal policy changes are also expected to boost activity, Barclays said. If the Trump administration eliminates the Federal Emergency Management Agency, for instance, local governments could tap the muni market for climate-related projects. Additionally, should there be government funding cuts to hospitals and colleges, debt sales can fill those gaps, the strategists said.
Deals have come from all corners of the market. Some of the largest transactions include a $2.18 billion issue from New York University and $2.5 billion to help fund Brightline West, a private rail line connecting Southern California and Las Vegas.
Muni-bond sales from public school districts have surged nearly 40% from the same period last year and airport financings are up more than 50%, according to data compiled by Bloomberg.
The influx has allowed investors to be “choosier,” said Gabriel Diederich, a portfolio manager at Baird Asset Management. “It gives the investor really a great opportunity to look across a large number of bonds and pick and choose what’s the best fit for their portfolio.”