Post-Election Considerations for the Municipal Bond Market
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))
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.
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