Episode summary
Munis Poised to Extend Gains Amid Unclear Fed Policy Path
Bloomberg Surveillance
· · 6 min · Guests: Scott Diamond
Summary
Municipal bonds have been a strong performer this year despite a noisy macro backdrop, but the main story is heavy supply. Scott Diamond of Goldman Sachs argues that 2025 issuance is running around $550 billion to $560 billion, well above a normal year, and that pressure has steepened the muni curve relative to Treasuries while widening credit spreads.
Diamond says the market is absorbing the paper, but not without consequences, and he expects the issuance wave to continue into 2026. He points to infrastructure financing, delayed projects, and higher construction costs as reasons governments keep coming to market, even when rates are not ideal. He also says some issuers rushed deals ahead of possible tax-exemption changes tied to the one big beautiful bill.
The conversation also makes the case for active management and pooled vehicles. Diamond says the muni market is fragmented, which is helping ETFs and active ETFs gather flows, but he argues individual investors may struggle to track credits closely enough, especially when changes in federal policy affect hospital and healthcare borrowers.
Key takeaways
- Scott Diamond says 2025 muni issuance is running around $550 billion to $560 billion, creating heavy supply pressure across the market.
- Diamond says the muni curve is steeper than the Treasury curve, with the 2-to-30-year spread around 160 to 170 basis points versus roughly 110 to 120 in Treasuries.
- He expects heavy issuance to continue in 2026, with the street looking for another $522 billion to $620 billion of new supply.
- Diamond says ETFs and active ETFs are attracting flows because the muni market is fragmented and difficult to trade efficiently.
- He argues individual investors may struggle to monitor credit risk closely enough, especially for healthcare names affected by Medicaid reimbursement changes.
Notable quotes
“the story we're going to talk most about for munis in 2025 has been supply”
“Our market is used to something in the context of a 400 billion new issue calendar in any given year”
“This year we're going to come in somewhere around 550 to 560 billion heavy, heavy supply”
“If you look at the flows into the industry so far, year to date, plenty of demand”
“Expect heavy issuance for next year”
How the episode opens
They tend to sell at the wrong time, don't they? But that's okay. As a portfolio manager, as a trader, keep those roles combined.
It allows you to stay in touch with the market. It's an over the phone market. It's an over the Bloomberg chat market.
A lot of things going on. And I think the way you framed it is right, Tom, I can't be sitting in an office and afraid I'm missing some of that back and forth. You've got to be in the trenches, sit on the trading desk in the trenches, combine the portfolio manager with the trader role, and that allows you to respond as the market changes.
What is the most efficient package given total return to acquire municipal bonds? Don't tell me it's individual paper. There's got to be a more efficient way to do this.
Well, for a lot of our clients, they like the individual bonds. That's fine. It works for them.
But historically you've had mutual funds. More recently, I just heard the prior segment ETFs. Who would have thought ETFs come to the municipal bond market?
Right. I feel like this is Fred Flintstone meeting The Jetsons. We have a market that has tens of thousands of issuers.
It's difficult to to think of that in an active exchange traded fund, but we're there. If you look at the flows into the industry so far, year to date, plenty of demand. A lot of it's going to ETFs and importantly, a lot of it's going to active ETFs.
And I think that's a reflection of just how fragmented our market is and where the opportunities lie. I'm just looking at the I and go function on the Bloomberg terminal. Across the board, municipal bonds are putting in some solid returns so far for investors.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- municipal bonds
- fed policy outlook
- muni issuance
- yield curve steepening
- 10-20 year muni segment
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Munis Poised to Extend Gains Amid Unclear Fed Policy Path” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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