Around the World with Munis:
It has been nine years since we last looked outside the United States to see how other countries fund their infrastructure projects. Back in 2017, there was no real equivalent to the U.S. municipal bond market anywhere in the world. That raised a simple question: if other countries do not have municipal bonds like we do, how do they fund local infrastructure? And why has no one successfully copied the U.S. model? Are municipal bonds only born and raised in the USA?
Municipal bonds started 2026 the way MainLine West anticipated, but we believe the story is taking shape. Strong and stable demand, led by inflows and reinvestment proceeds, are outpacing the slow re-emergence of issuance. The key to MainLine West’s 2026 Outlook is the growth in demand, and a calm, low-fear Muni fear index. So far, so good.
Muni Market Review
Municipals had a strong start to the year. New issuance was limited, while a large amount of cash entered the market from coupon payments and bond maturities. Munis outperformed, up .94% for the month versus US Treasuries down -.05%, and US Corporates at up .22% (Bloomberg Composite Indices). This outperformance puts Munis in a favorable position heading into February, when reinvestment demand remains healthy.
Additional January highlights:
- The Muni yield curve steepened, with yields lower from 17 to 13 bps on the short-end and higher 4 to 6 bps on the long-end. Munis remain at all time curve steepness.
- Taxables are flat along the curve higher 5 to 3 bps.
- Year-to-date inflows are running strong at their highest levels since 2021, a year Munis outperformed by 3%. One of the keys to our 2026 outlook is the growth in demand. So far, so good.
- Another key to MainLine West 2026 outlook is a stable and low fear index, which appears to still be the case for 10-year yield volatility and VIX (stock market) volatility index.
MainLine West is set to begin a second wave of liquidation for Fund V and anticipates another 30% to 50% of capital to be returned in the next 30 days.
For the month, the MainLine West Tax Advantage Funds finished flat to up 2% higher in NAV. The Funds with the shortest duration exposure did the best as the yield curve steepened.
Market News & Credit Update
- Barclays recently published research examining how AI is reshaping the higher education sector, which remains an important part of the municipal bond market. The study suggests that universities that adopt AI early may benefit by offering programs and coursework aligned with future workforce needs. Liberal arts institutions may also remain relevant, as skills such as critical thinking and connecting complex ideas are likely to stay in demand in an AI-driven economy. In contrast, schools with heavy concentrations in IT support, accounting, advertising, and general business programs may face increasing pressure, as these areas are more vulnerable to automation and changing labor demands.
- Morgan Stanley did a study on BWIC (bid wanted in competition used to sell bonds to the highest bidder) and found some interesting takeaways:
- Higher coupons receive more competitive bids
- Completion rate is higher as well as volume, in line with growth in issuance.
- Odd lots are as liquid as round lots (i.e.: $100,000 par versus $105,000 par).
- Some sectors are more liquid than others. For example, hospital and housing bonds are not as liquid as airport and general obligation bonds.
- There is a high yield liquidity premium (lower price) when selling lower credit bonds.
- Texas continues to expand its presence in the municipal bond market. The state’s share of outstanding municipal bonds has grown steadily, rising from about 8% in 2006 to approximately 14% today.
Background:
The last time Mainline West reviewed the global municipal bond scene was in 2017, and back then there was cautious optimism that some other countries may be able to build something resembling the large, retail driven, diversified, and highly regulated municipal market. At that time, there had been efforts from developed and underdeveloped countries to produce something similar. Nine years later, some progress has been made, but nothing that approaches a true U.S. style Muni-Market.
MainLine West looks to review what has happened in nine years, and what new countries are now in pursuit of a Muni market to finance infrastructure needs.
Special thanks to Peter Magen for his research and assistance in this worldly review.
Around the World with Munis:
The United Kingdom
In 2017, the United Kingdom stood out as the one country experts believed had the strongest potential to develop a municipal bond system similar to that of the United States. At that time, the UKMBA (UK Municipal Bond Agency) was working on financing a local deal and did so successfully in 2020 for Lancashire County Council. This ended up being a one and done deal as the Public Works Loan Board (PWLB) is still the dominant lender in the local authority financing market throughout the UK at $151 billion USD of issuance. The UKMBA was originally designed to help councils borrow cheaper than the PWLB, but this was never consistently true. The PWLB loans are cheaper, easier to access, and already operate at thin margins which led UKMBA to fail. The UKMBA Lancashire deal was not tax-exempt, so no cost savings on the County’s borrowing rate. On top of pricing, councils were unwilling to jointly guarantee each other’s debt or pursue their own credit ratings, thus limiting the UKMBA’s ability to be a player. UK infrastructure funding remains a fully centralized public lending model, with PWLB now occupying an even stronger position than it had nine years ago.
Sweden
If the U.K illustrates institutional consolidation, Sweden illustrates growth and specialization. Over the last decade Kommuninvest, remains the core financing channel by pooling Swedish municipalities and issuing short-term debt for ESG, housing and other infrastructure projects. Only the largest Swedish cities: Stockholm, Gothenburg, Malmö (via its utilities), and Helsingborg issue directly into capital markets. The structural differences between Sweden and the U.S. are significant. Swedish municipalities do not operate with U.S.-style taxing autonomy and are funded through income tax and statutory transfers from the central government. There is also no municipal bankruptcy framework comparable to Chapter 9 in the United States, making fiscal resolution more administrative and policy-driven rather than judicial.
Another difference from the U.S, which has a heavy retail footprint, Sweden’s market is almost entirely institutional and increasingly international. Kommuninvest ($51.5 billion USD in size) routinely taps EUR and USD markets, and the investor mix now leans toward global banks, insurers, and asset managers, rather than domestic households.
Africa
The African continent remains the least developed municipal finance region in the world, with no broad municipal bond markets and only isolated pockets of consistent issuance. The notable exception, and the only functioning municipal bond ecosystem on the continent, is South Africa.
As of 2022, South Africa remained the only country in Africa with consistent, rated municipal bond issuers, but less than $1 billion in size. Metropolitan municipalities dominate borrowing with only four municipalities having issued bonds, representing over 25 individual issues with 10–15-year maturities. South African municipalities benefit from diversified income streams derived from taxes and fees, and unlike many emerging markets, they do possess taxing power.
Unlike the U.S., there remains no retail market for bonds. Most issuance is purchased and held by banks, pension funds, and other institutional investors to maturity as there is no real secondary market.
Outside of South Africa, issuance exists but is scarce and sporadic. The most prominent recent example is the City of Agadir in Morocco, which issued a municipal bond to support green and inclusive infrastructure as part of a broader urban development effort. Beyond these isolated cases, most infrastructure funding, including South Africa, occurs through development bank lending, donor-backed finance, and national-level green or sustainability bonds.
China
China offers perhaps the most striking contrast to the U.S. system in scale and trajectory. Since 2017, China has built the world’s largest sub-sovereign debt segment in absolute volume, without developing anything resembling a U.S. style Muni ecosystem. It uses municipal debt to execute its public policy objectives.
China’s government bond market is divided into two primary categories: Central Government Bonds (CGBs) and Local Government Bonds (LGBs). China’s total fixed income market now stands at approximately USD $25 trillion USD, and LGBs accounts for 34% of all Chinese bonds ($8.5 trillion vs US Munis at $4.4 trillion).
LGBs are almost entirely domestic instruments owned by commercial banks, with only 2.4% held by foreign institutions. China has evolved its LGB market over the years to make them more attractive for investors, but the investor base will continue to be dominated by domestic banks. It is this debt that continues to grow to stimulate economic growth that has many investors worried about the long-term solvency of the Chinese Communist Party.
India
In 2015, India set up SEBI regulations to standardize issuance and encourage cities to seek funding beyond just state and Federal grants for infrastructure. Urban Local Bodies (ULBs) issuance remains episodic, not continuous, only from large financially strong cities and all revenue backed (no general obligation pledges). Cities in India do not have independent taxing powers like those in the US. There remain only tens of billions worth of issuance, but it is growing as urbanization in India is accelerating.
Once again, the main buyers of ULB’s are Banks, insurance companies, pension funds and corporations. They are private placements, and only specific issues are tax-exempt.
Poland:
Poland has one of the largest municipal bond markets in Europe at tens of billions of issuance by Local Government Units (LGU). The market is well established and used for local infrastructure projects. Most issuance is private placements from major cities, owned by banks, not tax-exempt, and are basically loans in the form of a bond. Unlike most other international issuers, Polish cities can issue “general obligation” bonds, as they are backed by shared income tax, property tax and transfers from the central government. LGUs are very secure as they operate under strict statutory debt limits and the issuer cannot walk away from its obligation.
Conclusions:
Nine years after Mainline West last examined global muni markets, the world is still far away from producing a second US muni-style system. Where are we now?
The UK has moved toward centralization, and further away from a Muni market.
- Sweden has moved towards pooled ESG and short-term debt.
- Africa is experimenting, with South Africa leading the way with anything close to resembling a Muni market.
- China uses municipal debt to execute its domestic policies and is supported by its banking system.
- India is growing, but is limited due to lack of taxing power and market development.
- Poland is interesting as LGUs have taxing authority but has built no true bond market, and remains centralized in scope.
The United States remains the only country with a large-scale municipal bond market that is retail driven, broadly diversified, supported by taxing authority, tax-exempt for investors, and governed by standardized disclosure practices. The major obstacles to creating a U.S.-style municipal market elsewhere include:
- Lack of taxing authority, so no reliable revenue for repayment.
- Lack of regulatory control and guidance.
- Inability to borrow at lower rates due to tax-exempt status.
- Inability to develop a market and financing for small issuers.
- Inability to build a buyer base outside banks and other institutions.
Infrastructure financing is a global challenge, but it is one the United States has largely solved. The U.S.-style municipal bond market aligns incentives for both investors and issuers, supports locally planned and built projects, and extends beyond just the largest municipalities. U.S. investors and residents benefit from a system that finances essential infrastructure in a way that broadly shares the advantages. It is a model the rest of the world has yet to successfully replicate. Municipal bonds are truly born and raised in the USA!
