Muni Bonds Seen Rallying as Clinton Pledges to Tax High EarnersBy
10-year tax-exempt bonds yield almost as much as Treasuries
Barclays says election often profoundly affects municipals
If investors in the $3.8 trillion municipal-bond market were focused primarily on their portfolios, they’d probably be rooting for a Hillary Clinton victory Tuesday.
The federal tax exemption on income from state and local debt becomes even more alluring if the Democrat is able to follow through on plans to raise taxes on those making more than $250,000. Republican Donald Trump favors massively slashing taxes, which he argues will stimulate growth, but that could make the securities even less of a draw.
“If you think that taxes are going to go up in a Clinton administration, then munis become more attractive,” said Jim Colby, a senior strategist who manages about $4.6 billion of VanEck municipal exchange-traded funds in New York. “If Trump wins and he sticks to his proposal of reducing taxes categorically across the board to some lower rate, that could have a dampening effect upon municipals because the impact of the tax-free coupon becomes less important or less significant.”
The outcome of the top U.S. executive contest often has “profound” effects on the municipal market since it can lead to tax policy changes, according to Barclays Plc. Investors try to foresee the direction and position accordingly, said Mikhail Foux, Barclays head of municipal strategy. A “relief rally” is expected if Clinton wins, he said. State and local debt has gained 3.3 percent this year through Nov. 3, trailing corporate bonds and Treasuries, according to Bank of America Merrill Lynch data.
Since the early 1990s, the muni-Treasury ratio -- which measures the yield of muni bonds against the returns of benchmark Treasury bonds -- falls when a first-term Democrat is elected because of the anticipated jump in the top tax bracket, and it rises when a first-term Republican takes the White House, according to Barclays.
A Trump victory would be less favorable to the market, said James Robinson, chief executive officer at Robinson Capital Management in Grosse Pointe Farms, Michigan, who runs a $140 million municipal bond fund of closed-end funds. He expects Clinton to “skate through” while Republicans retain control of Congress.
Both Trump and the Republican-controlled Congress have vowed to cut income taxes, making munis less attractive. In addition, the Federal Reserve would “absolutely,” use a Trump victory as an excuse for not raising interest rates in December, according to Robinson. The futures market sees a 74 percent chance that the Fed will tighten monetary policy at its December meeting, according to pricing in interest-rate futures markets.
“He’s the embodiment of uncertainty,” Robinson said in an interview at Bloomberg headquarters in New York on Friday. “Markets hate uncertainty, so I just can’t see that being good for markets.”
U.S. stock market volatility has surged as polls show a shrinking lead for Clinton before Americans head to the polls on Tuesday. For many, memories of turbulent financial markets after the U.K’s surprise vote to exit the European Union are still fresh. VanEck’s Colby called it “very dangerous” to make assumptions and position yourself based on one candidate winning at this point.
That said, “skittish” stock markets may spur a shift out of equities to a “higher-quality asset class” like municipal bonds, according to Dawn Mangerson, a managing director at McDonnell Investment Management, which oversees about $7.6 billion of tax-exempt debt.
While anxiety about the election has weighed on global markets as polls have shown Clinton’s lead shrinking, she still has an edge over Trump. A split government with Clinton as president is the base case for Blackrock Inc., the world’s largest money manager. That divide signals the difficulty of changing tax policy in the near term, limiting Clinton’s ability to raise taxes on those making more than $250,000 as she’s outlined during the campaign.
“With regards to the election itself, it’s going to be fairly status quo,” said Peter Hayes, who oversees $124 billion as BlackRock’s head of munis. “We’re not buying today in anticipation of tax reform, which gives us higher tax rates and therefore more demand for munis.”
The seasonality and market fundamentals are what’s driving Blackrock’s positive outlook for tax-exempt debt, not the expected election results, said Hayes, who called it a “very good time to buy munis.” The new-issue calendar is starting to dwindle. Municipal issuers have about $7.4 billion of bond sales planned over the next 30 days, the least since July, according to data compiled by Bloomberg.
At the end of the day, local election matters which often drive municipal spending may matter more than the winner at the top of the ticket.
“Whether or not you’re looking at tax policy or on a more local level credit concerns or kind of infrastructure policy, people are putting way to much emphasis on the presidential election,” said Tom Schuette, co-head of investment research and strategy at Solana Beach, California-based Gurtin Municipal Bond Management, which holds about $10.6 billion of state and local debt. "From a muni perspective, all politics is local.”
— With assistance by Martin Z Braun
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