Underwriting spreads for all bonds rose in the first half of 2025, continuing the upward trend from 2024, which saw spreads rise for the first time in 15 years.
Underwriting spreads rose to $4.38 in the first half of 2025 from $4.23 in the full year of 2024. Spreads on negotiated bonds rose to $4.75 in 1H 2025 from $4.47 in 2024, while spreads on competitive deals decreased to $1.89 from 2024's $2.69, according to LSEG data.
Spreads were at $7.11 in the first half of 2024 before ending the year at $4.23.
Refunding spreads increased, rising to $4.73 in 1H 2025 from $3.37 in 2024, while new-money decreased to $4.41 from $4.66 over the same period, per LSEG.
The gross underwriting spread is the payment or discount that an underwriter receives for marketing a deal. It is calculated as the dollar amount of the underwriting discount per $1,000 of an issue.
Rising underwriting spreads are a "flashing neon sign that the muni market is still nursing the hangover from higher rates and choppy flows," said James Pruskowski, an investor and market strategist. "Bankers are charging more to take risk and issuers are swallowing it, and those costs ripple through the entire system."
For investors, "a pricier underwriting process can sometimes bend deal structure in our favor, making bonds more attractive on a relative-value basis," though taxpayers still "pick the tab" as they end up with higher borrowing costs and less funding for roads, schools, and essential services," he said.
There is a correlation between issuance and underwriting spreads, said Michael Decker, senior vice president of policy and research at Bond Dealers of America.
Going back to 2015, there was a downward trend in underwriting spreads as firms increased efficiency, reduced business costs and leveraged technology, thus driving spreads lower, he said.
Average underwriting spreads, though, "dropped off" in 2022 and 2023 when issuance fell below 2020's then-record levels of $484.6 billion, Decker said.
During this time, interest rates spiked "hugely," and the muni market traded way off, putting issuers on the sidelines, resulting in less underwriting business, he noted.
"What we probably saw was underwriters competing against each other, where some were willing to cut their prices in order to get fewer deals that they were all chasing," Decker said.
Since then, underwriting spreads have risen to the highest levels in over five years. This comes as issuance surged in 2024, setting a record at $507.6 billion.
This year is set to surpass that figure, as issuers are coming to market at the fastest pace on record. Supply for the first half of the year was $281.8 billion, up 14.7% year-over-year.
"It doesn't surprise me that spreads have gone up a bit, especially from 2021, and even some of 2022, there was pretty easy market access. Now with heavier issuance, it may take a little more effort to get deals done," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
The influx in supply is helped by the sheer amount of deals, with 4,757 deals in the first half of 2025, up from the 4,304 deals in 1H 2024, according to LSEG.
Many of these deals are also sizable, including 16 mega deals of $1 billion or more in par value, Olsan said.
Furthermore, some of the mega deals were "Brightline-type" deals characterized by a very "yieldy-specific investor-based focus," Olsan said.
Around 80% of the deals that came to market during the first half of 2025 were negotiated and around 20% were competitive.
"When you have a higher percentage of negotiated people coming into a heavy issuance market, you might be expected to pay a little more for the marketing and invest in investor access that way," Olsan said.
If volume keeps coming at this pace, it's possible underwriting spreads could spike, Decker said.
"The bigger the volume, the more negotiating power it gives underwriters with issuers because there's other business that they can take if one deal falls through," he noted.
However, if rates and flows stabilize, spreads will compress once more, Pruskowski said.
"Until then, higher spreads mean taxpayers pay more and get less for the projects that matter most," he said.
But at this level, rising underwriting spreads are healthy for the market, said Jock Wright, an underwriter at Raymond James.
"You need people in this market, investors and issuers need liquidity. We are delivering a service and getting paid a fair price," he said.
