Post-Election Considerations for the Municipal Bond Market | Lord Abbett
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Fixed-Income Insights

Lord Abbett Partner and Director of Tax-Free Fixed Income Dan Solender shares his insights on the 2020 Election and municipal bond markets.

Transcript

Hello, this is Dan Solender, Partner and director of tax-free fixed income and Lord Abbett. We're here on the Wednesday after the election, in the morning. And while the outcome is still uncertain, there are a lot of implications for the municipal bond market that have kind of already been determined.

(INTERSTITIAL: U.S. Fiscal Stimulus)

First of all, it appears the Senate is going to stay with the Republicans. And with that being the case? Number one, it appears... It appears as if the stimulus bill would not be the large one the Democrats wanted, but will instead be a smaller version. Then it will have to be a compromise between the Republicans in the Senate and the Democrats in the House. And maybe the White House. We'll have to see how that turns out. But that implication means that there's less money going to the state and local governments than there would have been under Democratic control of the Senate, not a terrible situation, but just not as optimistic as it could have been because it would've been beneficial for some of those state and local governments to get more money. There still will be stimulus. So that money will go to education, healthcare, uh, airports, airlines, all kinds of different things that are financed by municipal bond market. So there will be something positive, it just will be smaller. And the timing of it's uncertain and the exact details are uncertain.

(INTERSTITIAL: U.S. Tax Rates)

Another thing we will find is tax rates. If the Democrats had gotten control of the Senate and the Presidency and Congress, they very likely would have tried to reverse Trump's tax bill from a couple of years ago, and would have increased tax rates for individuals and for corporations. (wipe) Still, it's a good situation for municipals ever since we had that tax bill with a cap on state and local taxes, and the benefit of the tax exemption. It's been positive for municipals. So it's still good for municipals. It just will not be as big a change as it might've been happened with the Democrats being in control of the Senate and the White house. Um, so those are two major things we're seeing so far.

(INTERSTITIAL: U.S. Infrastructure Spending)

We've been talking about infrastructure for years. When Trump took control four years ago, there was an expectation he would have a big infrastructure bill. Now, of course, that hasn't happened. And now the Democrats, if they'd gotten full control, there was an expectation that they would have the ability to push their own infrastructure bill. (wipe) The implication on the infrastructure ill was just that there was a potential for an increase to supply of municipal bonds if the bill went through, uh, which could have put some challenges on the market, but that doesn't appear to be likely.

(INTERSTITIAL: Municipal Bond Market Overview)

So a lot of interesting things going on, um, in terms of how it overall affects the market, um, you know, still: Credit quality has really been holding up very well throughout this time, back in March and April, there were very good, big concerns about the implication of the economic slowdown from the virus. Here we are in November and, you know, revenues are down a little bit at the income tax level on the sales tax level, but not down that much, uh, only down to less than 10%. So not a obviously down and having an impact on budgets, but nothing like what was being projected back in April real estate taxes are stable, given that they are not moving much in, if anything, real estate is doing well around the country and could push up the evaluations of real estate. Um, so overall the municipal bond market is holding up. Uh, there are some negative movements and some of the outlooks on some of the credits, uh, but you know, things have been going well, nothing should change materially going forward. The only areas that might see more stress, uh, would be things like Illinois and New Jersey and some of the States that were looking for a bigger stimulus money and particularly Illinois, because, um, they also had it on the ballot yesterday, a, uh, vote on whether to go from a flat tax to graduated tax system where higher taxpayers would pay a higher tax rate. And that was rejected by the voters. So going forward, it will likely need more revenue if possible.

(INTERSTITIAL: (wipe; no text))

Dan:

Investors are going to be looking for places to find extra income in an environment of low rates and attractive yields. Municipals could be viewed definitely as attractive by individual investors as they compare different opportunities.

(INTERSTITIAL: (wipe; no text))

This is Dan Solender and that's conclusion, and we appreciate your listening to us and thanks for your interest in Lord Abbett.


IMPORTANT INFORMATION

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

Market forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. A portion of the income derived from a municipal bond may be subject to the alternative minimum tax. Any capital gains realized may be subject to taxation. Federal, state, and local taxes may apply. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results.

The credit quality of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

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The views and opinions expressed by the Lord Abbett speaker are those of the speaker as of the date of the broadcast, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Neither Lord Abbett nor the Lord Abbett speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered.

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