How a shifting buyer base, evolving credit threats, and the value of bond insurance will shape 2026

Since the release of part one of my 2026 Outlook, LSEG has revised slightly upward its 2025 volume total to just over $581 billion from almost $580 billion previously. Strong capital needs, a supportive rate environment, and looming concerns over the loss of the muni tax-exemption during the first half of 2025 were all drivers of 2025 supply.

My 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 moderate decline in anticipated inflation, a lower, but not necessarily significantly lower, rate environment, 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. I expect policy-driven volatility to be tempered in 2026 ahead of the November mid-terms, and so I would anticipate issuance to be more front-loaded in the first half of the year.

While I recognize the potential trappings of forecasting supply, I do find value in the exercise.

When I formulate a number or range, the key considerations include views (with varying levels of subjectivity) on interest rates, permissible types of issuances under the existing tax code, anticipated levels of market volatility, aggregate par sold 10 years ago, which provides indications for current refunding activity in the forecast year, previously approved bond ballots, the pipeline of critically needed "bedrock" financing, climate change needs and preparedness, and credit and overall economic conditions.

I expect higher new money as well as refunding activity given the rate environment and the universe of refundable candidates. With lower rates, I expect 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.

Much of the forecasted year-over-year increase in volume comes amid infrastructure motivations. The market can expect a broader application of P3 involvement fueled by natural disasters, aging infrastructure, traffic growth and competition. Airports, mass transit, toll-roads, bridges and tunnels, and the nation's power grid would all be major beneficiaries of infrastructure initiatives.

ETFs and SMAs show no signs of slowing
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.

Federal Reserve data shows cash allocations into muni ETFs of $186.5 billion from 2022 through the second quarter of 2025. Q2 2024/2025 growth year/year was 240%. Deposits into muni ETFs have been recent outliers with continued allocations into muni ETFs expected to accelerate in 2026. The asset class now represents a generational shift with growing interest from younger investors.

ETFs have moved beyond a risk allocation into a more sophisticated, strategically designed investment vehicle, offering customer diversification and elevating competition for traditional mutual funds. Nevertheless, the transition away from mutual funds will be slow as mutual funds remain a strong investment selection.

We are also seeing the conversion of traditional mutual funds into active ETFs, but growth in the ETF wrapper must come with best practices.

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 investment goals with a focus on tax-efficiency, customization, active management, transparency, competitive fees, and capital preservation. As we know, SMAs offer a portfolio of individual bonds that are directly owned by an investor but are professionally managed on behalf of those retail clients, as opposed to mutual funds or ETFs where investors own proportionate shares of a pooled instrument.

Just like in 2023 and 2024, SMAs spent much of 2025 investing on the shorter end, thus holding shorter ratios at richer levels. With a shift in monetary policy and a steepening muni yield curve, duration extensions have become the value trade with better performance seen out along the curve during the second half of the year. Based upon buy-side conversations, certain SMA strategies show movement further out along the curve, or as I like to call it, "curve creep." Many SMAs are looking for the 4%, 5% coupon structures with more serials and fewer 30-year terms.

During 2025, SMA growth has brought this segment of the market to an estimated $1.2 trillion in assets out of a $4.3 trillion market, thus representing a far greater component of the muni bond market compared to muni ETFs. Much of this can be attributed to previously mentioned characteristics as well as favorable credit fundamentals along with yield and income opportunities. Again, this growth signals a shift away from a traditional mutual fund focus. I expect SMAs to be a key beneficiary of continued electronic trading in terms of enhanced growth potential.

ESG and cybersecurity remain as central issues in 2026
ESG will extend its public finance presence in 2026 and beyond with climate change and 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 associated litigation.

Despite the potential for Republican efforts to support anti-ESG legislation that may restrict investment criteria, I do not foresee fund managers encountering substantive challenges to their investment policies nor do I expect an impact to general ESG issuance trends and appetite for ESG-centric investments.

The market, however, needs to assess any structural changes to the Federal Emergency Management Agency (FEMA), and how such changes may impact the scope and timing of funding surrounding a natural catastrophe. Should municipal governments and their enterprise units need to shoulder a greater financial burden, there could be budgetary concerns and potential credit erosion, particularly if the absence of FEMA funds necessitates additional debt issuance to cover the expenses and shortfalls.

Cybersecurity concerns were a growing part of the 2025 investment narrative and will likely intensify in 2026 and beyond for municipal governments and their enterprise units. The risks to municipal credits are rising, especially where cyberattacks are fueled by financial gains. Cyberattacks represent a clear and present threat to all aspects of our way of life and could gravely disrupt our nation's financial system, array of infrastructure assets, including our power grid, water supply, and transportation systems, health care delivery protocols, communication and information technology networks, and the security of our food stock.

There have been various instances of cyberattacks targeting municipal governments, health care providers, and even a primary market distributor of offering documents and host of online investor roadshows, with the intent to gain access to personal information by installing harmful ransomware. We have seen rating agency downgrades due to the financial impact, with cybersecurity risk becoming an even more important aspect of the credit assessment process.

We have also witnessed non-ransomware attacks designed to disrupt strategic operations for certain enterprises. Enhanced cybersecurity responses and preventative measures along with a broader use of insurance help insulate financial and operational exposure for municipal issuers, but the growing expenses associated with insurance premiums and such preventative and remedial actions add budgetary pressure for a number of obligors. These are the types of concerns that require greater bond disclosures.

Muni bond insurance continues to add value

The muni bond insurance penetration rate approximated 8% of total par through 2025 as issuers recognize the intrinsic value of the wrap, offering enhanced liquidity and better capital market access for many, lower borrowing costs, and an offset to potential underlying credit diminution. Given the supply forecasts for 2026 and the shifting buyer base, I expect insurance penetration rates for 2026 to be modestly higher.

Not only has the primary market been active, but secondary insurance coverage has also been accelerating. Institutional investors ? understanding that the policy provides credit enhancement, not credit substitution, and that credit standards on underlying obligors should not be relaxed ? desire to better insulate their portfolios from possible credit erosion and to enhance portfolio liquidity.

Our good friend, Mike Stanton who is head of strategy and communications at BAM, added the following insight, "One trend we saw during the second half of 2025 is an increasing use of partial insurance on larger issues, where insurance helps attract additional institutional accounts to a deal, and also can expand individual buyers' capacity on a deal, because the insured bonds and uninsured bonds can benefit different strategies under a single institutional manager." Stanton provided as an example, the Los Angeles Department of Water and Power issue sold last November, where BAM wrapped approximately $205 million of the $976 million deal.

Stanton further added, there is "favorable pricing economics for higher-coupon bonds because secondary policies are more attractive for bonds priced to maturity versus debt priced to the call."

Our good friend at Assured Guaranty (AGO), Robert Tucker, senior managing director, head of investor relations and communications, shared with us that, "As the consistent leader in bond insurance, Assured Guaranty (AGO) has seen increased par production on a sale date basis, year-over-year, over the past four years ? with our insured par reaching $25 billion in 2025. We believe that demand for our insurance will continue this positive momentum during 2026. With estimates by several market strategists that new issuance will reach the $600 to $650 billion range for 2026, both issuers and investors should have additional opportunities to benefit from our insurance."

Tucker further stated, "In addition, we believe that we will continue to see the use of our insurance on transactions of all sizes, including on larger transactions, as we have seen over the last number of years. For example, in 2025, we insured $1 billion of bonds for the Dormitory Authority of the State of New York, $600 million of bonds for JFK International Airport's New Terminal One, and $844 million of bonds for the Downtown Revitalization Public Infrastructure District in Utah."

According to Tucker, "During 2025, demand for bond insurance remained solid and continued to meet the market's evolving needs. Assured Guaranty's (AGO) market share of par insured has been approximately 60% over the last number of years, and we believe that in 2026, investors and issuers will continue to recognize and rely on the benefits of Assured Guaranty's (AGO) bond insurance."