Boom Times for Muni Bonds

Municipal bonds are booming, with state and local governments issuing an unprecedented amount in the past two years.

“2024 was a record year,” says Justin Marlowe, director of the Center for Municipal Finance at the University of Chicago. “A lot of people looked at that and thought it was a remarkable thing and a kind of a one-time thing … and then 2025 was another year of even more record-breaking issuance.”

State and local governments issued $498 billion in muni bonds in 2024. They beat that record in 2025, issuing more than half a trillion dollars’ worth. Michael Stanton, head of strategy and communication for BAM Mutual, a company that insures municipal bond issues, puts the final number at around $580 billion. Most of those bonds are newly issued, rather than refinancing of existing bonds.

What are states and localities taking on all this debt for? For the most part, infrastructure.

Public spending on construction rose from the early 1990s until around 2009; in the wake of the Great Recession, that spending declined and did not return to pre-recession levels until late in the decade. In the past few years, governments have been spending heavily to address deferred maintenance and expand systems to meet current needs.

COVID-19-era federal funding had helped kick-start infrastructure projects; with that funding expired, many local governments turned to bonds in 2024 to fund continuing the projects toward completion, Marlowe says. Some local governments also turned to bonds to help replace frozen federal funding for some renewable energy and transportation projects.

Most of the bonds issued last year supported education, followed by transportation and utilities, according to London Stock Exchange Group data. Several categories showed a sharp increase in the number of bonds issued from 2023 to 2025: The number of education bonds increased by 58 percent, transportation bonds rose 66 percent, and electric power and health-care issues grew 87 percent and 184 percent, respectively.

Governments are also using bonds to help with multiyear projects whose costs have risen over initial estimates. Inflation drove up construction material prices, and labor costs are up as well, Marlowe notes. Many of these projects are too essential to scale back — such as work to bring water systems into Environmental Protection Agency compliance — necessitating finding new funding. The One Big Beautiful Bill Act is also shifting more social safety net costs onto state and local governments, which could also be a factor spurring more bond issuance, says Emily Brock, director of the Government Finance Officers Association (GFOA)’s Federal Liaison Center and a member of GFOA’s Debt Committee.

When Is Debt Too Much?

It’s common to use bonds to spread the cost of an infrastructure project over many years. Interest paid to bond buyers is not the only expense: Issuing bonds requires paying for lawyers and municipal advisers, negotiating prices and maintaining continued communication with investors throughout the life of the bond, so governments don’t use the bond market lightly, says Brock.

“If you’re going to go through all of that, you’re going to make sure that those bonds are supporting other things that are fundamental, foundational — an underpinning of infrastructure in your community,” she says.

Governments typically get community buy-in, with residents approving new issuances through bond elections. (Although Texas legislators, for one, have proposed setting the bar higher by requiring two-thirds voter approval rather than a simple majority).

Some cities have defaulted — famously, Detroit — but this is rare. Typically, governments see warning signs in the market: If they start taking on too much debt, investors will demand higher and higher yields before being willing to take a chance on those bonds, Marlowe says.

Eager Buyers

That pushback isn’t here now. Even as governments have drastically upped their bond issuance over the past two years, buyers have responded eagerly. “Very few, if any, issuers have said they’ve had trouble finding buyers for their bonds,” Marlowe says.

Demand is rising, especially among investors who fear that the stock market has risen as far as it can and want to put their money into a lower-risk option should stocks tumble, Marlowe says. And investors who once might’ve turned to U.S. Treasury bonds are increasingly seeing municipal bonds as the safer choice.

Events like President Donald Trump’s long-running threats to oust Federal Reserve leadership, his efforts to impose tariffs and concern that the U.S. government isn’t committed to balancing its budget have left many investors skeptical.

“There’s a lot of people who think you’re having to take more risk now with treasuries than ever before, [and] if you’re going to take some risk on a bond, you’re better off buying water/sewer bonds for a big city,” Marlowe says.

Individual investors, not corporate buyers, tend to purchase most municipal bonds, either directly or through vehicles like mutual funds. Banks and other parties buy some as well. Along with being more stable than stocks, municipal bonds are tempting because their interest is usually exempt from federal income tax. Bonds issued by the tax filer’s home state are also generally exempt from that state’s income tax.

At some point, the municipal bond market could become saturated, but Marlowe doesn’t anticipate this on the near horizon: “I don’t think there’s widespread risk … of government borrowing more money than they can repay, especially given that a lot of the borrowing is for basic essential projects like drinking water, storm water, electric utility upgrades.”

He and other experts predict that municipal bond issuance will remain high — or rise even further this year. Governments will continue to see high demand for new infrastructure to provide affordable housing; meet surging demand for electricity, driven in part by the proliferation of data centers; and adapt for climate risks, such as by hardening sea walls and restoring wetlands to better control flooding.

“I’m convinced that this trend will continue,” Marlowe says. “It would not surprise me a bit if we saw another $550 billion, maybe $600 billion, of new issuance this coming year.”