As we approach the end of 2024, the municipal bond market has demonstrated resilience amidst a backdrop of economic fluctuations and evolving fiscal policies. For municipal issuers, staying attuned to these trends and anticipating future developments in 2025 will be essential for maximizing opportunities in the evolving market landscape. Here are a few of my observations of the key trends which shaped the market for this year, as well as fundamental considerations for next year.
Significant Trends in 2024:
Supply: The key trend in 2024 was the increase in the supply of municipal bonds. The surge in issuance is partly due to municipalities taking advantage of more favorable market conditions over the prior year, but primarily to the funding of deferred capital projects, as issuers moved forward with projects notwithstanding construction inflation and supply chain issues. The increased supply has been met with strong demand, particularly from retail investors seeking tax-exempt income. Moreover, to account for any election uncertainties, there was a surge of issuance ahead of the November elections.
Infrastructure: Another significant trend has been the focus on infrastructure. With federal support for local initiatives, infrastructure projects have become a major driver of municipal bond issuance. I would expect this trend to continue as municipalities prioritize upgrading and expanding their infrastructure to support economic growth and resilience.
Sector-Specific Trends in 2024:
Healthcare and Higher Education: Both sectors have seen robust issuance as healthcare and higher education institutions seek to upgrade facilities and expand services. Intensive capital needs and the ongoing need for modernization have driven demand.
Transportation: Investments in transportation infrastructure, including roads, bridges, and public transit systems, have been a significant focus. Federal and state funding initiatives have supported these projects, aiming to enhance connectivity and reduce congestion.
Utilities: The utilities sector, particularly water and sewer systems, has seen increased bond issuance to address aging infrastructure and regulatory compliance. I’ve noticed that the push for sustainable and resilient utility systems has been a key driver. We also saw gas and energy prepay transactions become a meaningful portion of overall utility issuance.
K-12 Education: School districts and have been active in the municipal bond market, issuing debt to fund new construction, renovations, and technology upgrades. The emphasis on improving educational infrastructure to support population growth remains strong.
As we look ahead to 2025, several factors are poised to shape the municipal bond market.
Tax Policy in the 119th Congress: The incoming presidential administration has proposed more than $2 trillion in new tax cuts, while also proposing to extend the nearly $4 trillion in tax cuts under the Tax Cuts and Jobs Act (TCJA). To fund the administration’s proposal, additional revenues will be required. One potential source of revenue could come from eliminating the exclusion of interest earned on certain types of municipal bonds. However, in my view, the threat to tax-exemption is impracticable considering the importance of municipal bonds in building and maintaining U.S. infrastructure.
Disclosure Standards: There is ongoing discussion about enhancing disclosure standards for municipal bonds and whether uniform standards will accomplish the intended objective of mitigating risks and broadening the investor base.
The Federal Reserve: If the economy performs broadly as expected, the Federal Reserve is likely to cut rates – when and by how much remains an open question. If the Federal Reserve lowers rates as anticipated, it would be favorable to the municipal bond market.
Fiscal Policy: It’s been my observation that municipal issuers have solid finances, with revenue sources like property, sales, and personal income taxes doing well. State and local governments are expected to maintain strong fiscal positions, supported by robust reserves and prudent financial management.
By focusing on credit quality, leveraging favorable market conditions, and prioritizing infrastructure, municipal issuers can navigate the challenges and capitalize on the opportunities that lie ahead for the municipal bond market.
