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Fixed-Income Insights

Weighing the implications of the November 6 results for municipal bond investors. 

The results of the 2018 U.S. midterm elections on November 6 had an immediate, slightly positive impact on the broad municipal bond market, with the benchmark Bloomberg Barclays Municipal Bond Index moving higher on November 7. But the results are unlikely to have much of a lasting influence on market performance, at least over the short term, because they were mostly anticipated. 

With the Democrats taking control of the House of Representatives, the major issue of a possible second round of tax cuts, as recently floated by President Trump, was most likely eliminated. Lowering taxes would have reduced the benefit from the tax exemption of interest on municipal bonds, and likely would have pushed down prices of muni issues. 

Other positive impacts upon municipal bonds were more sector- or credit-driven. For example, voters in three states, Utah, Nebraska and Idaho, passed ballot initiatives expanding Medicaid coverage to more people. This was a provision which had been initiated by the Affordable Care Act; many other states already took this action without ballot measures in order to attain increased Federal government support. Expanded Medicaid insurance coverage in those three states likely will reduce the unpaid expenses of hospitals for patients who do not have insurance, which could have a positive influence upon muni bonds in the healthcare sector. 

In Illinois, a Democrat was voted governor, replacing a Republican.  With one-party control assured as Democrats also hold the Illinois legislature, lawmakers should find it easier to successfully reach budget agreements—and enhance the state’s ability to increase revenues to improve its pension funding. This may have positive credit implications for Illinois’ municipal debt. There will be other state-level impacts from the net increase in Democratic governors which will need to be evaluated in states such as Wisconsin.

Another important development: There were many ballot initiatives approved that involved future municipal bond issuance in a number of states. These new issues are not imminent, but with many of these measures passing, it suggests that there is significant support for infrastructure spending. 

Finally, with divided power in Washington, one area that has been highlighted for possible legislative compromise is infrastructure spending, with both President Trump and Democratic leaders signaling some willingness to work together. This potential bipartisan initiative will need to be tracked to see if it can happen, and if it does, whether it will lead to increased municipal bond issuance.

 

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