Municipal issuance is on pace for a third consecutive record year, with dealers forecasting roughly $600 billion of new supply in 2026 after 2025’s record of about $580 billion. For municipal bondholders, the question is not whether the market can absorb the supply — so far, it has. Rather, the question is whether the debt being issued to fund this infrastructure wave is being taken on prudently at the issuer level, or whether it is quietly eroding the credit cushion that underpins the municipal market’s safe reputation built on extremely low default rates and the security of taxing power and essential services. Why Debt Levels Are Rising As demonstrated in the chart below, aggregate municipal debt outstanding has shrunk by roughly 16% in inflation-adjusted terms since 2005, even as GDP, state and local tax revenue, and personal income have grown by 38% or more. Record Municipal Issuance Infrastructure Necessity or Credit Warning Sign? By DANA SPARKMAN, CFA, Executive Vice President-Municipal Analyst, The Baker Group However, several forces are converging to push both debt levels and debt service costs higher. First, aging infrastructure needs to be replaced. The American Society of Civil Engineers’ latest report card shows the national infrastructure funding gap widening to $3.7 trillion, up from $2.6 trillion four years earlier. Second, demand for additional infrastructure is adding to that burden. For example, public power utilities are raising capital to meet AI-driven data center load, population migration necessitates more capital investment in some areas like Texas and Florida, and physical mitigants to manage climate risk are increasingly important. Meanwhile, the federal support that has let issuers avoid debt in recent years is fading. Pandemic-era stimulus funding for pay-as-you-go capital projects has run out, leading to a larger proportion of capital projects needing to be funded with bond proceeds. Timing compounds the problem as both construction costs and borrowing rates are elevated. Many issuers delayed projects as interest rates rose, expecting a pullback that never fully came, and are now financing those same plans at rates well above what they could have locked in a few years earlier. At the same time, inflation has driven up construction costs rapidly, making these projects much more expensive. 12 In Touch
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