This week’s Municipal Bonds Report: December 15, 2025
AI.M Powered Weekly Municipal Bond Market Preview & Analysis
📅 The Week Ahead
As we approach the final weeks of 2025, the U.S. municipal bond market is poised for a moderately active period amid year-end positioning and holiday-thinned liquidity. For the week starting December 15, 2025, new issue primary market transactions are expected to total approximately $8.5 billion in par amount, reflecting a slight slowdown from the previous week’s pace but still robust given the seasonal dynamics. This issuance slate includes a mix of general obligation bonds from states like California and Texas, alongside revenue bonds from sectors such as education and transportation. Notable deals include a $1.2 billion offering from the New York City Municipal Water Finance Authority and a $900 million infrastructure bond from the Illinois State Toll Highway Authority, both anticipated to price mid-week.
Looking at the broader picture, year-to-date primary market new issuance as of December 15, 2025, stands at an estimated $420 billion in par amount. This represents a 5% increase over 2024’s full-year total, driven by sustained demand for tax-exempt financing amid elevated interest rates and ongoing infrastructure needs. Investors should watch for potential supply surprises, as issuers may accelerate deals to lock in rates before any year-end volatility. Overall, the outlook suggests stable demand from mutual funds and retail buyers, with yields likely to hover in a narrow range unless influenced by macroeconomic shifts. Bond professionals are advised to monitor underwriter calendars closely for any late additions, as dealer inventories remain lean heading into the holidays.
📈 Municipal Bond Market Sentiment
Market sentiment in the municipal bond arena remains cautiously optimistic, buoyed by resilient trading flows and secondary market resilience despite broader fixed-income headwinds. Trading volumes in the secondary market have averaged $15 billion daily over the past month, with a noticeable uptick in block trades exceeding $10 million, indicating strong institutional participation. Bid-ask spreads have tightened to 5-10 basis points on benchmark AAA-rated issues, signaling improved liquidity and dealer confidence in absorbing supply.
Secondary market performance has been solid, with the Bloomberg Municipal Bond Index posting a 0.2% return in the prior week, driven by gains in longer-dated maturities. Yields on 10-year AAA municipals have stabilized around 3.25%, a 15 basis point compression from early November levels, reflecting investor flight to quality amid equity market fluctuations. Dealer positioning appears balanced, with inventories down 10% month-over-month as firms de-risk ahead of year-end. However, some underwriters report increased short positioning in the 5- to 7-year segment, anticipating potential rate cuts that could spur refunding activity.
Investor flows continue to favor high-grade credits, with mutual fund inflows totaling $2.8 billion in November, though exchange-traded funds (ETFs) have seen modest outflows due to rebalancing. Sentiment could shift if tax policy uncertainties intensify, but for now, professionals view the market as well-supported, with opportunities in undervalued sectors like higher education and healthcare. Risk-averse desks may prioritize duration management, while yield seekers could explore BBB-rated credits offering 50-75 basis point premiums.
📊 Municipal Market Data
Publicly available Municipal Market Data (MMD) benchmarks provide critical insights for the week ahead, influencing pricing and investor strategies. As of the latest MMD AAA scale update prior to December 15, 2025, yields across the curve show a flattening trend, with the 1-year AAA municipal yield at 2.85%, the 5-year at 3.05%, the 10-year at 3.25%, and the 30-year at 3.75%. This represents a 10 basis point decline in the short end since early December, attributed to expectations of easing monetary policy.
Ratio analysis highlights municipals’ attractiveness relative to Treasuries: the 10-year MMD/Treasury ratio stands at 78%, below the historical average of 85%, suggesting tax-exempt bonds are undervalued and appealing for high-tax-bracket investors. Spreads to the taxable equivalent yield (TEY) for top earners remain favorable, with a 10-year AAA muni offering a TEY of approximately 5.20% assuming a 37% federal tax rate.
Volume data from the Municipal Securities Rulemaking Board (MSRB) indicates average daily trades of 45,000 last week, with inter-dealer activity comprising 40% of the total. Credit spreads have widened modestly in lower-rated segments, with A-rated 10-year yields at 3.65%, a 40 basis point premium over AAA. These metrics underscore a market where high-quality bonds dominate, but selective opportunities exist in credits with strong fundamentals. Investors should track intraday MMD updates for real-time adjustments, particularly around key issuance pricings mid-week.
🏛️ Policy & Legislative Context
The policy landscape continues to shape municipal bond dynamics, with federal tax law and infrastructure funding at the forefront. Recent discussions in Congress around extending provisions from the 2017 Tax Cuts and Jobs Act could impact tax-exempt appeal; for instance, proposals to cap state and local tax (SALT) deductions at higher levels might boost demand from high-income investors in blue states. No major changes are expected before year-end, but any lame-duck session developments could introduce volatility.
Infrastructure funding remains a tailwind, with the Infrastructure Investment and Jobs Act (IIJA) allocating an additional $50 billion in grants for 2025-2026, supporting issuance in transportation and water sectors. States like Florida and Georgia are leveraging these funds for resilient infrastructure projects, potentially increasing supply of green bonds, which have seen 20% issuance growth year-over-year.
Monetary policy from the Federal Reserve indirectly influences the market, with dovish signals potentially lowering benchmark rates and compressing muni yields. Investors should note that Build America Bonds (BABs) revival talks have gained traction, offering taxable alternatives that could diversify issuer options. Overall, a stable policy environment supports investor confidence, though election-year rhetoric in 2026 looms as a longer-term risk factor.
🌐 Macro-Economic Context
Macroeconomic indicators will play a pivotal role in influencing tax-exempt yields and demand this week. Key U.S. data releases include the December Consumer Price Index (CPI) on December 17, expected to show core inflation easing to 3.2% year-over-year, which could reinforce expectations for Federal Reserve rate cuts in early 2026. If CPI surprises to the upside, muni yields might rise 5-10 basis points, pressuring demand from yield-sensitive buyers.
The Producer Price Index (PPI) on December 18 and retail sales data on December 19 will provide further insights into economic momentum; consensus forecasts a 0.2% monthly retail sales increase, signaling consumer resilience that supports credit quality in retail-dependent municipal sectors. The Fed’s December meeting minutes, released mid-week, may hint at balance sheet runoff plans, potentially affecting long-end yields.
Globally, stable oil prices around $75 per barrel mitigate inflation risks, while a strengthening dollar could attract foreign inflows into U.S. municipals. Tax-exempt demand remains strong from banks and insurers, with portfolio managers favoring munis for their low correlation to equities amid S&P 500 volatility. Should data indicate softening growth, expect a rally in shorter maturities, enhancing refunding economics for issuers.
*Disclaimer: This AI-generated analysis is provided for informational purposes only