October 28, 2025
Falling interest rates and restrained inflation have been a key context supporting the current equity bull market. A supportive Fed has guided rates lower in the absence of new inflation drivers which has been a boon to asset prices. Given our focus on potential interest rate risk, we wanted to talk about the municipal bond market and take a look at the implications of the New York City mayoral elections where Zohran Mamdani is the leading candidate with a platform focused on beefing up the social safety net through the creation of new tax/revenue streams. What kind of effect will this have on municipal financing where NYC and New York State are among the largest issuers in the US.
Municipal bonds have quietly re-emerged as one of the few bright spots in fixed income. With roughly $4.3 trillion in outstanding debt and a base of over 36,000 issuers, the U.S. muni market is both vast and resilient. Fundamentally, credit conditions remain strong: states and cities entered 2025 with near-record rainy-day funds, balanced budgets, and debt burdens that have barely grown relative to GDP since 2010. The average AAA 10-year muni yield of ~3.5 %—and 30-year yields near 4.6 %—translates to 6–8 % tax-equivalent returns for top-bracket investors, restoring munis’ long-lost yield advantage. Demand has been steady, with net inflows to municipal bond mutual funds totaling $24 billion year-to-date, while supply has been moderate. Credit fundamentals are also supported by strong employment—U.S. unemployment at just under 4 %—and broad state-level tax revenue growth averaging 4.2 % year-over-year according to the National Association of State Budget Officers.
Yet headwinds are building. Elevated Treasury yields and record municipal issuance—up 16 % year-over-year through August 2025—have capped price appreciation. Fiscal challenges are increasingly idiosyncratic: transit systems, hospitals, and public universities face structural deficits, while unfunded pension and retiree-health obligations remain a drag. The Federal Reserve’s slower-than-expected rate-cut cycle has kept duration risk front and center, with long-maturity muni prices still down roughly 8 % from 2021 peaks. Add the political risk of potential changes to the federal tax exemption, and investors are right to ask whether today’s elevated yields compensate for tomorrow’s uncertainty. In short, muni fundamentals remain strong, but policy and rate volatility—not credit defaults—pose the greater threat.
The Mamdani Moment: New York City’s Balancing Act
No municipal issuer looms larger in the public imagination than New York City—and no political figure has injected more uncertainty into its fiscal outlook than Zohran Mamdani, the newly elected progressive mayor whose campaign promises to transform the city’s spending priorities. Mamdani’s proposed ten-year $100 billion affordable-housing plan, fare-free buses, universal childcare, and city-run grocery cooperatives mark a sharp departure from the incremental fiscal orthodoxy that defined the Adams and de Blasio years. The financing model? Roughly $70 billion in new debt issuance—an increase of nearly 50 % over the city’s current general-obligation (GO) debt load—and a series of revenue offsets via higher local taxes on high-income earners and corporations.
According to the City Comptroller’s Office, New York currently carries about $125 billion in total debt across its GO, Transitional Finance Authority (TFA), and Municipal Water Finance Authority bonds. Servicing that debt consumes roughly 10 % of annual expenditures—a manageable level by large-city standards but one that would rise materially if Mamdani’s capital plan proceeds in full. Analysts at Barclays estimate that the proposed debt increase could lift annual debt-service costs by $4–5 billion, equivalent to roughly one full percentage point of the city’s personal-income tax receipts. Even under optimistic revenue assumptions, the city’s debt-to-revenues ratio could approach 190 % by the end of the decade, up from 137 % today.
Supporters argue that Mamdani’s plan is fiscally progressive rather than reckless. The proposed 2-percentage-point surcharge on million-dollar-plus incomes could generate $3.8 billion per year, while a corporate-tax hike from 8.9 % to 11.5 % might yield another $4–5 billion, according to modeling by the Citizens Budget Commission. Those revenues, if realized, could cover much of the additional debt service—at least on paper. And New York’s legal framework imposes a series of guardrails: a balanced-budget requirement, a general debt limit of 10 % of the five-year average property value, and oversight by the Financial Control Board, created after the 1975 fiscal crisis. Those institutions make an outright credit shock unlikely.
Still, investors are watching closely. Following Mamdani’s June 2025 primary victory, New York City 10-year GOs widened about 5 basis points relative to the AAA benchmark, modest but meaningful for a credit historically treated as quasi-sovereign. The caution reflects more than just debt arithmetic—it reflects uncertainty about policy credibility and tax-base elasticity. Roughly 41 % of New York’s personal-income-tax revenue comes from the top 2 % of filers, a group that remains mobile in an era of remote work. Out-migration of high-income residents could easily erode the projected revenue gains that underpin Mamdani’s math. The city’s own Independent Budget Office estimates that a 1 % decline in high-earner residency costs the city $450 million annually in lost income-tax revenue.
There are broader market implications. Because New York is among the largest issuers in the U.S.—its bonds make up roughly 6 % of all outstanding U.S. muni debt—a repricing of its credit would ripple through the municipal curve. A perceived leftward fiscal shift in the nation’s financial capital could raise borrowing costs not only for the city but for other large urban issuers such as Chicago, San Francisco, and Los Angeles, where progressive fiscal movements are gaining traction. On the other hand, if Mamdani successfully marries ambitious social investment with disciplined financing—using long-term capital budgets, oversight controls, and progressive but stable tax increases—New York could set a precedent for sustainable, equity-oriented urban finance.
For now, the municipal-bond market is giving the new mayor the benefit of the doubt. Spreads remain near historical averages, and rating agencies—Moody’s (Aa1), S&P (AA), Fitch (AA-)—have maintained their stable outlooks, citing strong reserves and governance. But the message from the market is clear: the math must match the mission. If spending runs ahead of revenue or if tax hikes dent the city’s economic base, the next repricing won’t be limited to New York—it could redefine the risk premium for municipal finance nationwide.
Sources
- SIFMA, US Municipal Bonds Statistics, Sept 2025.
- National Association of State Budget Officers, Fiscal Survey of States, 2025.
- Barclays Municipal Research, NYC Credit Note: Mamdani Plan Scenario, July 2025.
- NYC Comptroller’s Office, Comprehensive Annual Financial Report, FY 2024.
- Citizens Budget Commission, Analysis of Progressive Revenue Proposals, 2025.
- Moody’s Investors Service, Credit Opinion: New York City GO Bonds, August 2025.
- Parametric Portfolio Associates, New York City in the Headlines Again, July 2025.
- Barron’s, A Socialist Mayor? New York Bondholders Aren’t Worried—Yet, June 2025.
- Nuveen, New York’s Fiscal Outlook Under a Changing Tax Base, 2025.
- MSRB, Municipal Market Statistics and Holdings Data, 2025.
Other data sourced from Factset Research Systems Inc.
