Dealer inventories have risen over the past several weeks as bid lists remain elevated.
"Rising dealer inventories are both a bullish and a bearish signal," said James Pruskowski, managing director at Hennion & Walsh.
"Bullish because dealers are willing to warehouse risk at these levels. Bearish because when real money demand softens, there is no balance sheet standing behind it," he said.
Dealers have been "discounting bids enough to move product, but that only works as long as absolute yield levels and ratios are compelling enough to bring buyers back," Pruskowski said.
Currently, there are, but that is not guaranteed, he said.
With the choppy new-issue market — and "depending on how those relationships with the issuers work — some dealers might have chosen to take some inventory to get the deal done," said Dora Lee, director of research and partner at Belle Haven.
"There's always hope that there can be a better day to reoffer them in the market and recoup or minimize some of the losses, and preserve that relationship with the issuers as well," she said.
The rise in dealer inventories stems from rising bid wanteds, said Tim McGregor, managing partner at Riverbend Capital Advisors.
"The volume coming up for bid every day is a little more than the market can digest. So the levels are so good, the dealers are willing to stock a few more than usual, so that's probably why they're creeping up a little bit," he said.
This is a healthy development as it shows dealers are willing to put some bonds on the balance sheet at these levels, which are good levels, and work out of them later, McGregor said.
Dealer inventories are like a proxy for how much of a "shock absorber" the muni market has, especially in volatile markets, Lee said.
Rising inventories suggest dealers are acting as they're supposed to as shock absorbers, whereas in other periods of volatility, the market got a little sloppier because dealers weren't as prepared to step in and take things into inventory, she noted.
Throughout the year, dealer inventories have been volatile, averaging around $14 billion to $15 billion, said Jeff Timlin, managing partner and head of municipal bond investing at Sage Advisory.
At the start of the year, dealer inventories started off at lower levels. Market participants came in at the end of 2025 in droves — because of the interest rate environment — and picked up a "tremendous" amount of inventory. This led inventories to fall to just over $9 billion in January, down meaningfully from the $16 billion in December 2025.
But recently, inventories peaked above $18 billion in mid-September, a "pretty big swing" and the highest level this year, Timlin said.
Dealer inventories rarely top $18 billion, let alone $20 billion, and can happen due to muni credit events, tax policy changes and macro events, said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
Dealer inventories have risen above $20 billion at times over the past 15 years, Olsan said.
During the 2013 "Taper Tantrum" from May through September, inventories were between $20 billion and $25 billion. Between April and September of that year, the 10-year MMD traded from a month-end close of 1.69% to 2.54%, while the 30-year MMD traded from 2.84% to 4.12%, she noted.
In late 2017 and early 2018, the effect of 2018 tax law changes — moving the corporate rate to 21% — combined with heavy December 2017 issuance preceding the cut taking effect, saw inventories in the $20 billion to $25 billion range, Olsan said.
And just last year, during the Tariff Tantrum in April 2025, inventories briefly rose above $20 billion, she said.
Even with these larger figures, dealer inventories have still fallen significantly since before the Great Financial Crisis, driven by a confluence of post-crisis regulations that raised the cost of carrying inventory. This has made the market less reliant on dealer balance sheets and more on end-investor demand, J.P. Morgan strategists said.
Before 2008, dealer inventories were "materially larger," averaging $31 billion per quarter, rising to around $66 billion at the peak in the first quarter of 2008 and representing as much as 90% of quarterly supply, J.P. Morgan strategists said, citing Federal Reserve data.
Conversely, within the past five years, inventories have fallen significantly to an average of $14 billion, less than half of the pre-2008 period. They have remained in a narrower range of just $10 billion to $19 billion regardless of issuance and outflow cycles, they said.
The ratio of dealer inventory to issuance is now around 12% of issuance, according to J.P. Morgan strategists.
Therefore, dealers have had to price record supply at levels that clear the market to keep inventories low, they said.
"In a market with this much new issue supply, the question is whether end investor demand shows up with more than enough firing power to also clear dealer inventories," Pruskowski said.
