Municipal bond issuance was just shy of $300 billion during the first half of the year, as increased project costs, fading pandemic-era aid and the acceptance of a higher-for-longer interest rate environment led supply to rise year-over-year.
Supply was $299.293 billion in the first half, up 5.2% year-over-year, according to LSEG data. What has been "impressive," though, is the market's ability to absorb that supply, said Travis McGahey, vice president at Payden & Rygel.
"Strong reinvestment demand and steady fund inflows have kept pace with record issuance, which is why the market has remained so resilient," he said.
Supply started off the year "somewhat stronger than in 2025, before moderating slightly versus last year in the past several months, but annualizing first-half volumes points to a full-year total broadly in line with last year, perhaps slightly higher, leading to yet another record, with net issuance reaching $250–260bn and bringing the asset class a step closer to the $5 trillion mark," said Barclays strategists.
A shift this year has been that issuers have largely stopped waiting for lower interest rates, McGahey said.
"After two years of hoping financing costs would come down, many have accepted that delaying critical infrastructure projects often becomes more expensive than borrowing at today's rates," he said.
Project costs have risen over the past several years, driven by the "double whammy" of interest rates and inflation, as both upfront and ongoing costs have increased, said Cameron Parks, head of public finance origination at Truist.
These increased costs have led to larger deal sizes in some cases. For instance, an issuer may have come to market with a $50 million deal, but if the issuer came now, the deal size may be $75 million to account for increased project costs, said Miguel Laranjeiro, investment director for municipal debt at Aberdeen Investments.
Dwindling pandemic-era aid has also led to increased borrowing. During 2021 through 2023, there was stimulus, but that has dried up over the past several years, Parks said.
However, post-COVID is a "new environment where you feel that stimulus is gone, and you have inflation, and you have rates that are higher, so all three of those things factor into an elevated issuance environment," he said.
With issuance on track to hit $600 billion in 2026, the muni market is in line for another year of record supply and the third consecutive year of year-over-year growth.
"Typically, you see some growth, and then you see some kind of fall off or flattening, whether it's economic cycle, whether it's stimulus money, whether it's rates to some degree," Parks said.
This points to a "structural shift" in issuance rather than a temporary spike, McGahey said.
"Infrastructure needs haven't gone away, federal support has faded, and issuers have realized they can't indefinitely delay borrowing while waiting for a better rate environment," he said. "If rates remain around current levels, elevated issuance is likely to become a feature of the municipal market rather than a one-off event."
Coming into this year, municipal bond supply projections ranged from a high of $750-plus billion to a low of $520 billion, with most firms expecting issuance next year to be at least $600 billion, easily surpassing 2025's record.
At least two firms have revised their issuance forecasts, gravitating toward the expected $600 billion figure.
Barclays has revised its supply forecast upward to $580 billion-$600 billion from $520 billion-$530 billion. The firm now believes issuance will rise by up to 3% rather than fall 5%-7%.
BofA strategists, meanwhile, have revised their forecast downward to $600 billion from $640 billion after the initial prediction proved to be too high. However, issuance is right on track to hit $600 billion, they said.
June details
Total issuance for June was $61.084 billion in 1,012 deals, up 3.4% from $59.075 billion in 991 issues.
Tax-exempt issuance rose 2.6% to $56.857 billion in 906 issues from $55.395 billion in 893 issues a year ago. Taxable issuance rose 9.3% to $2.72 billion in 95 issues from $2.488 billion in 90 issues in 2025. AMT issuance was $1.507 billion, up 26.4% from $1.192 billion in June 2025.
New-money issuance fell to $41.528 billion from $43.479 billion, down 4.5%, while refundings rose 50.6% to $11.617 billion from $7.716 billion.
Revenue bond issuance rose 3.6% to $40.497 billion from $39.075 billion in June 2025, and general obligation bond sales increased 2.9% to $20.587 billion from $20 billion in 2025.
Negotiated deal volume was up 3.4% to $47.689 billion from $46.124 billion a year prior. Competitive sales rose 11.5% to $12.69 billion from $11.377 billion in 2025.
Deals wrapped with bond insurance decreased 28.7% to $3.437 billion from $4.818 billion.
Bank-qualified issuance was down 10% to $912.5 million in 233 deals from $1.014 billion in 228 deals a year prior.
California claimed the top spot year-to-date among states.
Issuers in the Golden State accounted for $45.029 billion, down 1.5% year-over-year. Texas was second with $33.618 billion, up 10.2%. New York was third with $26.994 billion, down 10.5%, followed by Alabama in fourth with 11.514 billion, up 103.3%, and Massachusetts in fifth with $11.365 billion, a 35.6% increase from the same period in 2025.
Rounding out the top 10: Florida with $11.235 billion, up 10.3%; Pennsylvania with $10.491 billion, up 6.4%; Washington with $8.495 billion, up 25%; Illinois with $8.494 billion, up 21.9%; and Michigan with $7.445 billion, down 6.6%.
