Bond volume forecasts revised upward over surging issuance
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Fears about changes to the tax exemption, shifting macroeconomics, growing capital needs and inflation-induced added costs to complete projects, including those that have been long-delayed, led state and local government issuers to bring debt at a record pace, with issuance already on track to break
The volume currently stands at $310.166 billion, up 17.4% from $264.151 billion at the same time last year. Now that the second half is underway, several firms revisited their supply projections for the year, given the growth seen.
Initial forecast projections ranged widely, from a high of $745 billion from HilltopSecurities to a low of $480 billion from Barclays. While threats to the tax exemption were a big consideration, the predictions accounted for other factors, including growing infrastructure needs and spending, dwindling COVID-era aid, monetary and fiscal uncertainty and the general acceptance of rates staying higher for longer.
Few predicted the extent of the deluge of issuance, leading to the fastest pace of supply on record and some of the largest weeks of volume ever, despite tariff-induced volatility that led to some deals being postponed or moved to the day-to-day calendar. Ultimately the volatility did not hinder supply for longer than two to three weeks.
As a result, most firms revised their projections upward, and now all expect a record year of supply.
Municipal Market Analytics has revised its forecast to the $575 billion to $600 billion range. The firm initially estimated supply at $500 billion with an upside, but listed a wide range depending on the future of the tax exemption, said Matt Fabian, a partner at the firm.
The market’s growing supply in 2025 went beyond concerns about the tax exemption, as deferred funding for much-needed projects, the need for completion bonds and inflation, which has caused costs to soar, all contributed to volume, Fabian noted.
Refundings increased, as well, as borrowers are rescheduling upcoming coupons because they’re worried about near-term finances, while racing to issue before yields go higher, according to Fabian.
“You should be trying to firm up your plans as much as possible. And selling fixed-income bonds to finance infrastructure is an excellent way to firm up plans,” he said.
Bank of America raised its projection to $580 billion from an initial forecast of $520 billion, according to BofA strategists.
The revision is driven by an increase in the firm’s forecasted new-money issuance to $435 billion from $375 billion. Their projections for refunding volume remains the same, at $145 billion.
The revised forecast is due to “robust new financing growth and only a small decline of refunding volume YTD vs the same time last year,” they said.
However, should a “surprise bullish case for bonds materialize in 2H25 — say, the 10-year AAA stays below 2.50% — total issuance volume may reach $600 billion, with $445 billion of new money and $155 billion of refundings,” BofA strategists said.
Ramirez revised its projection to $575 billion, up from $515 billion, said Peter Block, managing director and head of municipal strategy at the firm.
He cited increasing new-money needs, which are “inflating along with economic growth.”
The firm also predicts a rate cut from the Federal Reserve will accelerate issuance in the final months of the year.
J.P. Morgan raised its projection, now forecasting $560 billion, up from $490 billion. Tax-exempt issuance is projected at $510 billion, and taxable and corporate CUSIP issuance at $50 billion, said J.P. Morgan strategists, led by Peter DeGroot.
Most of the increase in its tax-exempt forecast is to account for the record supply that occurred from January through May, since it predicts that issuance will slow going forward.
Sectors that heavily contributed in those months — education, airports, and healthcare — will not keep up their pace in the second half, as issuance was spurred by fears about the muni tax exemption, which have since subsided, J.P. Morgan strategists said.
Barclays raised its issuance projection to a range between $530 billion and $540 billion, a roughly 10% increase from its initial forecast of $480 billion to $490 billion.
The firm expects supply to slow in the second half, but still chose to adjust their forecast to account for the record issuance in early months.
New-money mostly drove the increase in supply, while refundings may be “taking a small step back,” including a significant decline in Build America Bond refundings through extraordinary redemption calls, according to Barclays strategists.
Moreover, tender activity has declined “dramatically” in 2025, contributing to slower refunding issuance, they said.
In Hilltop’s November forecast for the upcoming year, Tom Kozlik, head of public policy and municipal strategy at HilltopSecurities, posited two scenarios that surrounded tax policy.
If the tax exemption was eliminated, then supply would surge to $745 billion, but if the threat to the tax exemption did not materialize, then issuance would be at $535 billion, he said.
However, now that the One Big Beautiful Bill preserved the tax exemption, Kozlik is shifting to the second scenario.
His forecast may be revised further once the next gross domestic product figures come in.
For the rest of the year, issuance may start to “fall away,” but will still remain strong, according to Kozlik.
Chris Brigati, managing director and CIO at SWBC, has not changed his forecast of $525 billion to $550 billion but believes it’s more likely that the higher end of the range will be met.
Issuance in the first half of the year was at $281 billion, a record amount of semi-annual issuance, but there could be a modest slowdown in supply during the second half, “as higher long-end municipal yields are less attractive” at the moment, he said.
At some point, he said, crossover buyers may start to provide a “backstop” to these higher ratios and, by default, rising long-end rates, Brigati said.
The increased need for borrowing following the pandemic and the immediate post-COVID lull is expected to persist, as delayed infrastructure needs can no longer be ignored, he noted.
Brigati’s forecast could be changed if “the Fed engages in a rate-cutting campaign and fulfills their current forecast of two rate cuts for the remaining meetings in 2025, we could see an increase in borrowing as the market perceives lower rates as a path forward.”
However, he does not expect this to be the case, as he anticipates fewer than two Fed rate cuts, with a base case of only one cut and a strong possibility of zero cuts in 2025.
Janney forecasts supply will be above its initial prediction of $500 billion to $525 billion, barring any major market disruptions, said Alice Cheng, director of municipal credit and investor strategy at the firm.
The “higher issuance volumes reflect growing capital needs in state and local governments post-pandemic and issuers are no longer delaying in anticipation of lower rates,” she said.
The sectors with the largest increase year-over-year include K-12, higher education, and airports, while K-12 and hospitals are the sectors with the largest deal flow, Cheng noted.
