Will the upcoming elections affect the municipal bond market?

It’s a question we’ve been asked frequently as the election draws near.

While no one is certain how events will ultimately unfold, there are issues the president and lawmakers will need to address.

Several important provisions of the Tax Cuts and Jobs Act of 2017 will expire at the end of next year, including the top federal income tax rate, which under the law was lowered from 39.6% to 37% (“Gusher of Municipal Bonds”).

Raising income tax-rates on high earners makes municipal bonds more valuable, but it’s anyone’s guess as to what lawmakers and the president will ultimately do.

The same goes for other expiring measures, including changes to the Alternative Minimum Tax and the deduction for state and local taxes. Attempting to accurately predict their fate is futile.

Impact of presidential elections past

What we do know is that state and local governments have been issuing municipal bonds at a record clip amid the shadow of the election and the prospect of a decrease in the federal funds rate, which the Federal Reserve Board announced yesterday.

Otherwise, if the past is any indication, it’s unlikely the municipal market will be significantly impacted.

“Historically, presidential elections have generally had limited bearing on muni market returns,” according to a report from AllianceBernstein. “Republicans and Democrats each won three elections since 2000, and muni bond returns were positive for each election calendar year and the year after in four of the six periods.”

The 2008 and 2013 downturns were driven by “macro events – not election anxiety,” the report said. It cited the global financial meltdown for the former, and the “taper tantrum” – when the Federal Reserve Board announced plans to slow its quantitative easing program and Treasury yields spiked – for the latter.

We agree with this assessment, with an important caveat.

Where the spotlight should be

As longtime investors in individual issues, we recognized the events of 2008 and 2013 as opportunities in the municipal market (“Good News: ‘The Sky is Falling’). Yields climbed (and market values fell), but the municipal bond market was fundamentally strong. It was a propitious time to invest and those who did were rewarded handsomely.

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We have always focused on the municipal bond market, not headlines. In our view, the story isn’t who might or might not win the election, it’s the health of issuers and uncovering opportunities in the market.

Anything could change between now and when the new president and Congress take office. Currently, however, we see encouraging signs in the market (“Remarkable Feat in the Muni Market”) and attractive yields.

And we would take these signs over a crystal ball any day.