Key Findings
- Eighty-two percent of respondents identified political uncertainty as the biggest threat to the municipal finance industry over the next five years.
- Nearly 50% of respondents believe ongoing tariff-related volatility would pose moderate to significant risk to the overall municipal finance industry in 2026.
- Respondents broadly believe the public finance industry and associated businesses will somewhat outperform the broader economy in 2026.
- Slightly over 50% of our respondents believe recession will take hold for both the U.S. and global economies this year. Seventy-five percent believe that inflation will continue to grip the domestic economy, with almost 50% anticipating stagflation.
- Respondents identify the top three risks associated with AI adoption as data quality/accuracy, over-reliance and complacency, and cybersecurity threats.
- Just over half of our respondents expect higher overall bond supply in 2026 and 38% forecast volume to be about the same relative to 2025.
- Funding crises in higher education and healthcare are broadly expected this year.
Opening thoughts
The Bond Buyer conducted its
In my role as Market Intelligence Analyst, I will share my thoughts about the survey compared with my own three-part 2026 Municipal Market Outlook that was posted by The Bond Buyer during the week of January 5th.
When conducting these types of surveys, it is critical to elicit feedback from the various role-based professionals that keep the public finance industry dynamic and unique against a backdrop of inefficiencies specific to our $4.3 trillion marketplace. It is these very same inefficiencies that often catalyze investment opportunities and that should provide fertile ground for AI expansion and other areas of technological advancement.
The Bond Buyer survey is strategically designed to tether specific muni industry predictions to a macro-economic outlook, and collectively guide the narrative for the respondents' respective business lines into the new year.
The macroeconomic outlook
With a view into 2026, respondents voiced their concerns about the macroeconomic environment generally, as well as for the municipal finance industry specifically. Barring any unforeseen event, 65% of respondents generally anticipate their businesses to show minimal to moderate advances, with 68% forecasting minimal to moderate growth for the public finance industry, outperforming overall growth expectations for the U.S. economy.
Slightly over 50% of our respondents believe recession will take hold for both the U.S. and global economies this year. Seventy-five percent believe that inflation will continue to grip the domestic economy, with almost 50% anticipating stagflation. Should these scenarios materialize, our survey participants see ample likelihood of moderate to heavy risk to the municipal finance industry.
Central to my 2026 outlook, recession is not factored into my base case forecast. Should recession set in, I would expect a mild and short-lived contraction, based largely on proven resiliency our economy displayed over the past few years, and consistently demonstrated consumer reliability despite recent retrenchment.
While the consumer will continue to support economic strength, even into the next recessionary cycle, consumer sentiment can be tempered by expanding levels of consumer debt, thinner savings, and broadening gaps in socio-economic standing. Growth performance is visibly uneven throughout regional U.S. economies and we are observing divergent employment trends across sectors and business lines against a backdrop of overall flat job advances and higher trending, yet perhaps stabilizing, unemployment. Such conditions supported a K-shape economy in 2025, and are likely to be evident in 2026.
In my opinion, inflation holds a low probability of reigniting, although we can expect ongoing cost pressures throughout the year. Thus, the Fed's easing trajectory should take on a preferably slow and steady course rather than an accelerated one that would normally be illustrative of a deep economic contraction. Monetary policy has made significant progress bringing inflation close to target, but more work needs to be done.
Respondents widely predict the fed funds rate will sit between 3% and 3.67% by yearend, with the median prediction at 3.37%. This is closely aligned with the Fed's own December Summary of Economic Projections (SEP), yet modestly higher than current futures market projections.
I would argue against frontloading too many rate cuts, particularly given still-emerging tariff-related price increases for various goods as well as higher service sector costs. Beyond our survey, the broader financial professional universe seems to expect one or two rate cuts in 2026. However, more rate cuts than expected could come about should the labor market picture appreciably deteriorate and become more consequential than inflationary pressures.
When queried about the "hottest take" on the municipal finance industry in 2026, 12% of the respondents see interest rates actually moving higher this year. Although this nominal response rate does not provide overriding guidance, the open-ended nature of the question adds statistical relevance as no choices were given in the survey.
I would suggest that a higher interest rate scenario would likely be fueled by reigniting inflation, unrelenting concern over the federal deficit, geopolitical shocks, or a combination thereof. Perhaps for now, a higher-for-longer interest rate scenario may linger. In my view, the outlook over Fed independence in 2026 will be a key concern. President Trump's nomination of Kevin Warsh to succeed Jerome Powell when his tenure ends in May has received guarded optimism from the financial markets. Certainly, Mr. Warsh is well credentialed, but assurances will be needed that the new Fed chair, if confirmed, will preserve the central bank's independence and integrity without undue political influence.
Although included as a possible choice, monetary policy was not identified as a "top-five" threat to the municipal finance industry over the next five years. Political uncertainty was selected as the top threat by respondents, followed by legislative actions, cyberattacks, municipal credit quality deterioration, and climate-related risks or natural disasters.
These results are quite appropriate given that survey respondents heavily concurred that there will be continued volatility in use of tariffs throughout the new year, against a backdrop of a loosening U.S. regulatory environment. Nearly 50% of respondents believe that ongoing tariff-related volatility would pose moderate to significant risk to the municipal finance industry overall, while 41% see moderate to significant risk to their respective businesses.
Soon after Donald Trump was sworn in as president on January 20, 2025, his administration embarked on a multi-point policy campaign that infused a great deal of uncertainty into both the financial markets and the global economic outlook. In my view, trade rebalancing initiatives remain embroiled in fits and starts without having clear messaging on GDP and inflation, and will likely present continued challenges in 2026.
Industry trends
I would suggest the relatively favorable outlook for the municipal finance industry and related businesses is tied to expectations for heavy bond issuance and compelling market technical conditions. Record issuance levels were set in 2024 and 2025, with a significant portion of survey respondents anticipating another issuance prize in 2026.
Referring back to the "hottest take" on the municipal finance industry in 2026, 19% of the respondents identified an increase in bond issuance. Again, the results merit consideration given that the open-ended nature of the question was presented without choices.
Looking at the specific polling questions for muni volume, about half of our respondents expect higher overall supply, and 38% forecast volume to be about the same relative to 2025. Similar results are shown for supply expectations for tax-exempt bonds only, with somewhat lower forecasts for taxable issuance. Fifty-three percent of the respondents expect total issuance this year to exceed $500 billion, while 36% anticipate supply at about $500 billion.
My own 2026 volume range forecast is $570 billion to $590 billion, likely making another record supply year should the upper range of my forecast come about. Here, I factor in a slight decline in anticipated inflation, a lower — but not necessarily significantly lower — rate environment, the pipeline of capital-intensive projects, and higher 2016 issuance over 2015 issuance, which, along with lower rates, could elevate the "call" economics. Should the economy show greater weakness than anticipated, with associated revenue declines, volume could be impacted.
With lower rates, I expect there to be elevated taxable advance refundings, but rates would have to drop to a compelling level for there to be a substantive shift from 2025. Let's recall that the 2017 Tax Cuts and Jobs Act eliminated the ability to do tax-exempt advance refundings.
Interestingly, 47% of respondents predict $1 trillion or more will be needed annually to fund U.S. infrastructure over the next decade. This suggests heavy pent-up demand for infrastructure funding, and potentially sets the stage for above-consensus issuance during the next 10 years, as current funding levels may be inadequate to support infrastructure demands.
About 50% of respondents expect market issuance to increase somewhat from 2025 levels mostly for utilities, transportation, general government and housing. Lower issuance increases are projected for the healthcare and higher education sectors, likely guided by the swelling credit and funding pressures for these cohorts.
Interestingly, when asked about issuance expectations in high-yield healthcare and higher education spaces, 80% and 78% of respondents, respectively, anticipate supply to increase somewhat or remain close to 2025 levels. In my view, having access to the muni high-yield market may be the only source of funding for these sector types given their elevated capital needs, inflationary cost pressures, visibly depressed margins, depleted COVID-era stimulus, uncertain payer mix composition (hospitals), shifting demographics, and pricing pressures. I suspect that anticipated demand in the muni high-yield space — given a desire for higher investor cash flow — factored into this result.
Over 40% of respondents expect most bond types to show somewhat higher supply year-over-year, except for green or ESG-labeled bonds, with over 70% forecasting the same or somewhat lower supply for green or ESG-labeled bonds. A comparable percentage believes demand for green or ESG-labeled bonds will be similar to or somewhat lower than the experience from last year.
I suspect that expectations for green/ESG bond issuance can be tied to heightened regulatory oversight and thinner project funding from the federal government given existing political realities, growing voter resistance to support tax and utility rate increases that can underlie green bond credit structure, as well as issuer-specific budgetary pressures that are resulting in a re-prioritization of debt management practices.
Against such robust supply, demand stood front and center to absorb the volume. Nearly 45% of respondents believe there will be somewhat to significantly higher overall demand for municipal bonds in 2026, with 47% thinking that demand will be about the same. Given the volume forecasts, the results for bond demand seem in alignment. I suspect that a greater supply of bonds can provide diversification opportunities for multiple buyer classes, particularly for SMAs.
Respondents generally see continued growth across ETF and SMA platforms, with 57% and 45% respectively anticipating higher investment activity from 2025 to 2026. Most respondents expect investment activity to remain the same for mutual funds, banks, and insurance companies year-over-year. I see investment activity for these three cohorts being the same or slightly lower in 2026. For banks and insurance companies, much of their investment strategies are tied to tax rates, internal tax structures, alternative relative value choices, rate uncertainty, and investor-specific volatility.
The muni market has witnessed explosive growth within the ETF space since the introduction of muni ETFs in 2007. More firms are now adding them to their model portfolios as growing demand for actively managed fixed income ETFs continues.
As we know, ETFs retain more stock-like features, trading with real-time pricing and intraday flexibility. Muni ETFs are desired for their tax-efficiency, a more compelling fee structure thanks to index-based strategies and reduced trading or friction costs, transactional ease with no hedging or leverage, diversification, liquidity benefits and above-average credit quality attributes.
The growth in muni SMAs can be linked to personalized investment strategies and goals with a focus on tax-efficiency, customization, active management, transparency, competitive fees, and capital preservation. In 2026 and beyond, issuers and municipal advisors are expected to become even more in tune with transaction structure needs of an expanding buyer base.
The Bond Buyer survey reveals mixed results about how well climate and severe weather-related events are being addressed in issuer credit disclosures. While just over 10% of the respondents believe that related disclosure is either being very poorly addressed or very well addressed, 30% view climate-related disclosure as being somewhat poorly addressed, while 43% state that such disclosure is being somewhat well addressed. Given these results, one can generally conclude that expanded disclosure for climate and severe weather-related events is needed and this is where bond attorneys, issuers and municipal advisors can work together to strengthen disclosure standards.
In my view, ESG will extend its public finance reach in 2026 and beyond mostly from a disclosure perspective as opposed to a supply-and-demand dynamic, with climate change and its threats representing a growing investment consideration tied to those affected areas of the country. Smaller utilities, for example, may be more exposed to climate risk/natural catastrophes and to associated litigation.
I am not suggesting the market will no longer see a broadening application of bond proceeds to combat climate change risks. Disclosure and enhanced credit evaluations, however, will likely take priority.
A number of polling questions surround expectations for credit quality, identifying general ratings trends, and those sectors most at risk. Just below 10% of the respondents believe upgrades will continue to outpace downgrades, 36% see downgrades beginning to outpace upgrades, and 54% view upgrades and downgrades being roughly balanced.
Most respondents believe a funding crisis will occur in higher education and healthcare this year, and resoundingly identified the higher education (80%) and healthcare (76%) sectors as the top two cohorts that will face the greatest challenges over the next five years. With these predictions, there are associated expectations of a better-than-60% view of moderate-to-heavy risk to the municipal finance industry, with less discernable risk to participant business lines. Over 60% of respondents predict higher defaults/impairments in 2026, with a similar response seeing meaningful risk to the municipal finance industry.
In my opinion, credit fundamentals should remain mostly favorable throughout 2026, but cracks in the credit veneer and sector-specific challenges are present, requiring greater levels of analytical rigor. I see the ratio of muni credit upgrades to downgrades continuing to tighten in 2026, with the likelihood of a more balanced relationship by yearend. State general obligation bonds and many local GOs can anchor portfolios given ample reserves and continued fiscal austerity. Essential service revenue bonds with tight legal provisions and proven operating performance having strong margins and debt service coverage are suitable for quality-oriented portfolios.
Some of the high-yield cohorts, such as project finance, senior living, charter schools, and conduit housing may experience more pronounced defaults and impairments. Certain technical default situations could evolve into actual monetary defaults throughout the year.
Quality-centric portfolios are advised to trade up and pursue a defensive shift in credit quality during periods of spread compression. Muni portfolio additions and realignment should be made with a disciplined eye toward quality and resiliency. Adherence to suitability needs and conservative investment guidelines should position portfolios defensively to mitigate potential shocks throughout a shifting monetary policy cycle and to prepare for economic weakness.
It is important to identify those credits that maintain consistent revenue performance, particularly during economic downcycles, and those that possess tax-rate flexibility and provide tax base and employment diversification, while avoiding those that show a disproportionate reliance upon one particular taxpayer or sector. These measures should help maximize portfolio returns, credit quality, liquidity, cash flow and diversification.
Impact of AI
Respondents were queried on the risks associated with AI adoption and the top three concerns are data quality/accuracy, over-reliance and complacency, and cybersecurity threats. In terms of specific impact upon municipal finance, significant change is expected in the areas of disclosure and compliance, credit analysis and research, pricing and trading, risk management and surveillance, and portfolio optimization.
Respondents are split on whether the "AI bubble" will burst in 2026. If a burst does occur, it's widely expected to present a risk to the municipal finance industry.
I believe that AI will impact all aspects of the economy, touching virtually every business vertical, and reshaping and differentiating the views currently held by many public finance stakeholders. It appears to me that respondent feedback logically aligns with the potential trappings of orchestrating this bold paradigm shift.
I do see AI having a significant impact upon many sectors of the muni bond market, particularly surface transportation, higher education, healthcare, and airports. Better clarity as to the types of roles issuers will play in developing AI infrastructure, and just how much capital market access would be required, should emerge.
Integrating AI into best practices will be challenging given the associated costs, the need for innovative learning tools, the overall selection and management of the data, the importance of preserving market competitiveness, efficiency and risk mitigation, and expectations for enhanced regulatory oversight.
For muni market stakeholders, the question is, "how will we take all of this data and assimilate it into something that is far more analytically powerful?" AI is a nascent concept in terms of muni market engagement, yet I expect to see a quickly expanding narrative. For example, the debate over AI data centers will take on a greater political, societal, environmental, judicial (potentially), and funding overtones.
