By Gayl Mileszko
Market Commentary
Record Books Smashed
The first quarter of the 21st century ended last week on a quiet note, but that final year was a wondrous year for the municipal bond market. During the first half of 2025, the industry rallied to thwart legislation that would have eliminated tax-exemption. Borrowers anxious to get ahead of any tax reform surprises flooded the market and investors scoured offerings of up bonds financing thousands of start-ups, improvement, and expansion projects long delayed by the pandemic. Yields were attractive, heavy calendars made for plenty of choice, and investors sought to put more than $510 billion of principal and interest payments back to work. The second Trump administration came in like a supercharged army and created significant gaps in funding for sectors such as higher education, which quickly turned to the bond markets to raise capital. Global turmoil frequently shifted investor demand to havens, including munis. LSEG reports that 2025 muni issuance surged to $579.9 billion, a record high, up 12.9% from 2024. Tax-exempt volume at $522.5 billion rose 16% and new money issuance increased by 9.3% to $430 billion. The Municipal Securities Rulemaking Board tallied a grand total of 11,574 new bond issues and $3.77 trillion of trading volume, the highest level since 2008, with a 17.6 million trades.
Education at the Top of the Class
LSEG data show that negotiated sales represented 80% of total 2025 muni volume, and 89% of all deals came with fixed rates. There were 406 private placements with combined par of $9.6 billion, including 12 for charter schools. Bond issues for the huge education sector topped the charts overall with $149.7 billion coming to market, including $35.3 billion for colleges and universities, $4.14 billion for public charter schools, and $634 million for private elementary and secondary schools. We tracked 125 public charter and private school deals with an average final maturity of 30 years and a 6.25% average maximum yield. Thirty eight percent were non-rated, 39% were investment grade and 22% had below investment grade ratings.
Senior Living Volume More Than Doubled
Industry-wide health care volume came in at $48 billion. Altogether there were 89 financings for assisted living and memory care, independent living, nursing care and continuing care communities with combined par of $7.46 billion. It is still not enough to meet the massive and growing demand, but it was double both the number and par amount of senior living issuance in 2024. The average final maturity was 2054, and the average maximum yield was 6.21%. Thirty-six percent of senior living deals in 2025 were investment grade and 9% came as below investment grade. Fifty-five percent were non-rated.
Salute to Our Muni Buyers
Households are by far the largest holders of munis with a 46% share, according to the Federal Reserve. Time and time again last year, retail stepped in — directly as well as through separately managed accounts, exchange traded funds, and money market funds — to compete with the big buyers – mutual fund families, banks, insurers, and others – for allocations in most of the deals that inundated the slate every week. Conventional mutual funds are undergoing a bit of change, now numbering 479 and holding $835 billion of assets. CreditSights reports that, one year ago, there were 511 funds with $811 billion. Dozens of open-ended funds were converted to exchange traded funds last year to meet growing investor demand for more liquid instruments with lower fees. Muni ETFs now number 157, up from 111 last year at this time, and boast $188 billion of assets, an increase of $48 billion or 34% over 2024. Net flows into funds totaled $54.2 billion in 2025, up from $47.3 billion in 2024 and negative $5 billion in 2023. Altogether, these funds have more than $1 trillion of AUM, an impressive total even when compared against the $3.08 trillion of taxable bond funds. We note that there is also a significant amount of cash in tax-exempt money market funds available for deployment: the Investment Company Institute reports a total of $150.25 billion, up from $136 billion at the end of 2024. The top ranked tax-exempt MMF currently boasts a 7-day yield of 3.16%.
Bonds Galore for Every Buyer
Some investors find that they sleep better at night by holding shorter maturities. Demand for the 2-year muni took AAA benchmark yields down from 2.82% to 2.39% in 2025. Index returns for 1–3-year maturities finished the year 3.72% higher. Ten-year yields fell from 3.06% to 2.76%, and 7-12-year tenors ended 5.75% higher. 30-year benchmark yields rose from 3.90% to 4.24% during the course of the year, and index returns for 22+ year maturities gained 1.75%. Some of the most attractive issues include airport bonds subject to the alternative minimum tax that, under current law, applies to only a small number of investors. Other investors are drawn to monthly pay, noncallable, insured, high grade, insured, and/or zero-coupon bonds. There are plenty of bonds available to meet every risk tolerance, investment goal and capital need and our sales and trading teams know where to find them.
A Year of Major Policy Disruption but Surprisingly Low Overall Volatility
Take a look at the long series of nearly unbelievable news headlines in 2025. Then see how markets not only quickly adjusted and grew accustomed to the upheaval — including everything from DOGE to Liberation Day to war and peace talks on multiple fronts, raucous debates over the massive tax and spending packing known as the One Big Beautiful Bill, pressure on the Fed Chair to lower rates faster, and a record-long government shutdown — but shrugged it all off and rallied across almost every asset class. The best performers were commodities: platinum and silver gained more than 170%, and gold was up 74%. The S&P 500 closed the year at +17.8% and the Nasdaq ended higher at 21.1%. Treasury indices returned 6.2%, while high yield corporates finished 8.5% higher and investment grade corporates gained 7.7%. Taxable muni indices outperformed with 7.6% returns, while high yield munis gained 3.35% and investment grade munis ended higher by 3.35%.
Essential Service Needs
MMD muni benchmark AAA yields have been nearly unchanged for four weeks, which some analysts see as a signal of a well-balanced market. There will likely be periodic flights to safety that will benefit the U.S. bond markets this year, but there may also be quite a few hiccups. Muni buyers may not easily absorb a supply that may grow to exceed $700 billion. CreditSights reports that higher levels of issuance are expected for energy pre-pay bonds and escalating needs for AI power generation. In addition, there are $135 billion of bonds with coupons of 5% or higher that are callable this year; only $71.7 billion was refunded in 2025. That could certainly put a strain on borrowers coming to market later in the year. Nevertheless, there is a tremendous need for more infrastructure, for more senior living and care communities, for sustainable community hospitals. A good number of families still seek more choice and better educational opportunities for their children. And there is a huge unmet demand for more affordable housing for our elders, workers and students. Those of us in the public finance business have our work cut out for us.