Muni market expands during Q1, could grow, experts say

The muni market has hovered around $4 trillion for the past 15 years, but if the record pace of supply continues, it could rapidly expand, according to market participants.

The muni market expanded during the first quarter of 2025 to $4.233 trillion, according to the latest Federal Reserve data.

That is up 0.8% quarter-over-quarter and up 3.2% from Q1 2024, the latter of which is the fastest annual expansion since 2010’s post-financial crisis issuance wave, said Matt Fabian, a partner at Municipal Market Analytics.

The growth of the muni market comes as issuance surges, with the first half of the year seeing $280.64 billion of supply, up 14.3% year-over-year, according to LSEG.

The influx of supply has led some firms to revise their initial 2025 forecasts upward, with several of the lower end predictions now surpassing 2024’s record volume of $500-plus billion.

The asset class has shifted to a “new paradigm” of heavy supply due to cumulative costs of cap expenditures increasing dramatically, COVID money having been largely spent, an acceptance that rates may not decline in the near future, and the potential increase in demand for funds from various issuers due to possible policy changes, said Barclays strategists.

“But due to a shift in issuance patterns, we expect the muni market to start growing again, having been stuck at a total size of about $4 trillion for many years,” they said. “If it starts expanding at the same pace as in the past two years, it should get to $5 trillion within the next few years.”

This growth would be welcome in the muni market, as the munis have been a $4 trillion asset class for “frankly, too long,” said Scott Diamond, co-head of AM Municipal Fixed Income at Goldman Sachs.

With gross domestic product and state and local government budgets growing, for the muni market “to be stuck at a $4 trillion size almost suggests we’re too small,” he said.

And, if “we have not issued enough debt to grow the municipal bond market, you could argue that, in essence, municipalities are less leveraged than they had been 10 to 15 years ago,” Diamond said.

“It’s hovering around that [$4 trillion] number pretty consistently because of tax law and other things,” said Ajay Thomas, head of public finance at FHN Financial.

“Your eligibility for doing transactions, there are only certain times or certain windows of opportunity you can execute refinancings. New money needs are fairly consistent. The market is sort of developed, unless there’s some new phase or thing that would happen to the market … that would be significant to add to municipal eligibility of some sort,” like the Build America Bonds in the Obama era, he said.

Growth within reason is good for the market, said Barclays strategist Mikhail Foux.

“If the thought is ‘OK, so we are at 80% or 90% ratios, and suddenly we’ll look extremely attractive to other asset classes,” other investors will come into the muni market, he said.

If not, Foux said the muni market is “stuck with retail, because at this level banks and insurers’ holdings continue to decline.”

“As the market grows — and it would stay cheaper in relative value to accommodate deal placement — it only encourages a broader range of buyers,” said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.

“If we hold higher relative value, meaning that we stay cheaper against taxable assets, that only incentivizes crossover buying,” she said.

“You can get 5%-coupon credits at par or discounts, if you’re willing to give up longer call protection or drop down into lower investment-grade names. That represents strong value on a historical basis. Even for a corporate buyer, the TEY works out to over 6.00%. Similar corporate bond yields require a step down into BBB or lower credits,” Olsan said.

Achieving Barclays’ $5 trillion figure would be a gain of 18.1% from the $4.233 trillion in Q1 2025, but growth in the corporate and Treasury markets would still outpace the muni market.

Since 2005, the muni market has grown by 38%, but growth in the corporate and Treasury markets has considerably outpaced that, as the corporate market has almost doubled and the Treasury market has surged 600% over the same timeframe, according to Pat Luby, head of municipal strategy at CreditSights.

In the corporate market, a business can borrow and invest in its business and hopefully earn a better return than the cost of borrowed capital, he said.

“That’s not the case in public finance, where this debt gets borrowed to pay for some sort of infrastructure investment. There’s a reluctance from public leaders to make the case for taking on more debt for these types of projects,” like schools and bridges, where cashflow may be tied up for 20 or 30 years, or the hidden costs of airports, toll roads, and even hospitals that are covered by the users, he said.

If the muni market grew beyond $5 trillion, such as doubling in size or even growing 50%, it’s unclear if “would there be enough demand from individual investors to soak up that incremental supply,” Luby said.

Currently, “the market seems well equipped to absorb this growth,” said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

“A renewed wave of retail investor interest combined with an expansion of institutional demand suggests that increased issuance could be smoothly integrated without disruption and as municipalities gear up to modernize and invest in long overdue projects, the municipal market is positioned to play a central role in infrastructure finance and in financing the next era of public investment,” he said.