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US state and local governments are selling municipal bonds at a record pace on fears that Congress could partially pay for President Donald Trump’s “big, beautiful bill” by cutting a tax break for airports, hospitals and affordable housing projects.
Tax-exempt US municipal bond sales were estimated at $19bn in the past week, according to JPMorgan. That marks the second-best week on record and keeps municipal issuers, which have already sold more than $220bn in debt so far in 2025, on pace to beat the record of $447bn set in 2024.
Market watchers say the bustling $4tn muni bond market is being driven by concerns that Congress may scrap or limit a tax break for so-called private activity bonds, which finance non-governmental projects that have some public benefit.
The US House of Representatives has approved a version of Trump’s landmark tax bill that leaves private activity bonds unscathed for now. But there is expected to be intense negotiation in Congress over the pricey legislation before the president’s deadline of July 4, leaving local governments and investors unsure whether the tax break will survive.
“Issuance has been on pace for the highest levels on record because inflation has increased the cost of doing projects and because issuers have been pulling forward issuance due to uncertainty around the reconciliation bill, among other reasons,” said Matthew Norton, chief investment officer for municipal bonds at AllianceBernstein.
“While the uncertainty regarding tax-exemption in the reconciliation bill is diminished, it is not eliminated at this point,” Norton added.
House Republicans floated ending the tax exemption for new private activity bonds in 2017, but the Senate version of the bill put the tax break back in and Congress eventually decided to preserve it.
The threat to the tax break caused “a real sense of shock and surprise” and led to “a really chaotic period in the industry”, said Leslie Powell, a partner with law firm Kutak Rock focused on public finance.
The muni bond industry has been better prepared this time to advocate in defence of the tax break, helping steer the House away from ending it. The Senate is seen as friendlier to the tax break for private activity bonds than the House, but the lower chamber is expected to have another look at the reconciliation bill if senators make significant changes.
“There is still a reason to be really watchful and mindful and not complacent,” Powell said.
Trump’s landmark tax legislation is projected to add $2.4tn to the US debt by 2034. The Congressional Budget Office, a non-partisan fiscal watchdog, estimated in December that abolishing the tax break for new private activity bonds could shave $43bn off the deficit over the next decade.
John Miller, head of municipal credit at First Eagle Investments, noted that muni issuance for school buildings and other education-related projects was running more than 20 per cent ahead of last year’s pace.
“It might be that the education sector has some ‘pull forward’ impact from the political environment,” he said.
