Risk appetite shrinking in the face of policy shifts

The Bond Buyer's 2026 Policy Pulse Survey

How muni pros are adapting to the federal policy environment

Key takeaway: Enhanced monitoring and staying on top of news is the most popular method among muni pros for adapting to policy changes.

Staying on top of policy changes for most means keeping a close eye on the news.

Muni professionals are turning to enhanced monitoring and news (36%) as the top action for adapting to current federal policy shifts, followed by client education and research (29%), stress tests and risk models (21%) and shifting to traditional sectors (17%).Other methods include credit/covenant discipline (16%), shift to essential services (16%) and funding diversification (12%).

Shifting to essential services (46%) was the top action taken by buyside respondents, while enhanced monitoring and news (55%) was the most popular for sellside professionals. Enhanced monitoring (35%) was tied for first among issuers with funding diversification (35%).

Respondents in the other category most often cited client education and research (20%), enhanced monitoring (20%) and stress tests (20%).

The frequency and volume with which new regulation and guidance is released in the world of municipal finance can make staying on top of policy no small task.

Earlier this month, the Municipal Securities Rulemaking Board released its strategic plan for fiscal years 2026 through 2030, highlighting three key guiding tenants for the four-year period: regulatory modernization, market transparency and public accountability.

"MSRB's strategic plan was shaped by the many conversations we've had with stakeholders from across the municipal securities market," Mark Kim, chief executive of the MSRB, said in a May 7 press release, adding, he could not "emphasize enough that the most important part of this strategic plan will be the ongoing engagement that will occur as we pursue these goals in the years ahead."

How policy shifts are impacting appetites for risk

Key takeaway: Outside of advisors and broker-dealers, appetite for risk decreased to a greater degree than it increased.

By and large, the last year and a half has seen much of the muni industry lose its appetite for risk.

Over the last 18 months, advisors and counsel (36%) saw the greatest increase in risk tolerance in response to shifts in federal policy around regulations. An equal share (36%) reported decreases in risk appetite, and 21% reported no change.

Roughly 28% of broker-dealers reported increase in risk appetite versus 29% who said their appetite for risk decreased over the last 18 months. Roughly one-third (36%) reported no change.

Fourteen percent of asset managers reported increased risk appetite, 64% decreased risk appetite and 21% with no change in appetite.

State and local issuers were the group with the greatest decrease in risk appetite (83%) versus 8% who said it increased and 8% who reported no change. 

Only 7% of those in the "other" cohort reported an increase in risk appetite, versus 28% who reported decreased appetite and 50% who said risk appetite was unchanged.

Regulations are just one part of the broader trend of changes plaguing the muni industry.

The ongoing conflict with Iran remains in the background of a larger new-issue calendar in May and lightened reinvestment has left muni pros waiting for the possibility of rate volatility.

"The lack of clarity on a more permanent and longer-term solution to the Iran conflict and restricted movement of oil vessels across the Strait of Hormuz" could potentially impact the muni market and credit, Mohammed Murad, head of municipal credit research at PT Asset Management, told The Bond Buyer. "I don't think there is a meaningful impact on municipal credit at this time, but any persistent rise in oil prices may create an environment of added pressure on credit, especially airports and toll-roads."