Presidential elections loom large for municipal bond investors for a good reason: the result can lead to policy changes with the potential to influence supply and demand in the muni market. After Donald Trump’s election in 2016, for example, munis returned -3.73% in the month of November as bond investors discounted the likelihood of lower personal income taxes and more stimulative fiscal policy1. 10-year AAA municipal yields increased by nearly 80 basis points in this short period2.
A lot can still happen between now and November 3rd, but prediction markets currently see a 55-60% probability that Democrat and former Vice President Joe Biden wins the White House. As of 9-24-20203.
How might that affect munis? If Biden is elected President and has a Democratic Congress to work with, he may move to raise personal and corporate taxes by repealing 2017’s Tax Cuts and Job Act (TCJA). We believe this would increase individual and corporate demand for tax-exempt munis. On the other hand, if President Trump wins reelection and Republicans hang on to the Senate, changes to tax policy are less likely. In our opinion, this would mean business as usual for munis. We also think it’s important to watch the election for cues to future aid to states and local governments. Democrats have continued to advocate for additional aid, while Republicans have been less eager to increase aid, citing the favorable impacts from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In our view, despite the headlines, current budgetary gaps are manageable without additional state and local aid.
The following chart looks at how possible election outcomes could affect the market.
