Municipal Bond Markets and the 2020 Election | Lord Abbett
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Market View

Lord Abbett’s municipal bond team shares their thoughts on the potential implications of the 2020 election for select areas of the tax-free fixed income market.

Read time: 2 minutes

For this week’s Market View, we decided to take a deeper dive into the municipal bond markets and the potential implications of the 2020 Election. (You can find additional commentary on taxable fixed income and equities on LordAbbett.com.) We’ll explore specific sectors, but before we do so, it’s important to note first and foremost that we believe municipal bond markets will be in good shape after Election Day regardless of which candidate wins. We think a Republican victory would mean tax rates remain where they are, and we think a Democratic victory would mean higher taxes for individuals and corporations. In both cases municipal markets would see strong demand.

 

Future Fiscal Stimulus

If the Republicans win, and there isn’t a significant amount of additional stimulus, we believe it will impact the overall supply in the marketplace. From what we’ve seen in recent weeks and months, any supply is being met with more than enough demand, and we think that’s likely to continue. If Democrats win, we believe the likelihood of additional fiscal stimulus increases, and the size of the bill would be that much greater. In our view, there would also be increased fiscal support for state and local governments.

The Health Care Sector

While Republicans’ plans for the health care sector are still to be determined, we think the sector has performed relatively well under the current administration. However, a Republican win could renew pressure on a reversal of the Affordable Care Act. Without knowing what an alternative would be, it is likely many people would lose health insurance, meaning more unpaid hospital bills.  If Democrats win, certain provisions of the Affordable Care Act could be reinstated, which means fewer unpaid bills and more proactive care.

Public and Private Education

We don’t believe there will be much of a change in higher education policy if Republicans remain in power. If Democrats win, we believe private universities within the education sector could face some uncertainty. The reason, in our view, is that any plan to provide lower cost or altogether free college education will likely better support public universities, thus reducing demand for some lower-tier private universities.

Real Estate & Other Tax Implications

If there’s a Republican win, it’s less clear as to where the underlying tax rate may go, but we imagine it might have little if any impact on the municipal bond market. We believe that a Democratic victory would likely mean higher taxes. We see this as a positive for the municipal bond market, as it would make the asset class much more attractive on a relative basis, both for corporations and individuals. A Democratic win may also mean a reversal of the cap on state and local tax deductions, which we believe could improve real estate values in higher tax states such as New York, New Jersey and California.

An Emphasis on Infrastructure

For the most part, we believe infrastructure will be a key focus for Washington after the election, regardless of outcome. This could increase municipal bond supply. While this could put some upward pressure on yields, we think the market is likely to absorb the new supply. One thing we’ll be keeping an eye on is whether we see an issuance of more taxable bonds (versus tax-exempt), which is what we saw after 2008 with the Build America Bond program.  At the same time, increased infrastructure spending will require new funding sources, which is a positive for municipal credit.

The days and weeks following the 2016 Election proved to be particularly challenging for municipal markets, when we saw a steepening yield curve and municipal bond fund outflows. We don’t believe the outcome this year will have an impact, and are focusing more on the economic implications of a potential COVID-19 resurgence.

 

A Note about Risk: 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. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. Credit risk is the risk that debt issuers will become unable to make timely interest payments, and at worst, will fail to repay the principal amount. Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements. 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. Income from the municipal bonds held could be declared taxable because of changes in tax laws. 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. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state, and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risks, including the loss of principal invested.

This material is provided for general and educational purposes only. The examples provided are for illustra­tive purposes only and are not indicative of any particular investor situation.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

The Affordable Care Act is the name for the comprehensive U.S. healthcare reform law enacted in 2010 and its amendments. The law addresses health insurance coverage, healthcare costs, and preventive care.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in Market View are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research, or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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2020 Election Scorecard

MARKET VIEW PDF


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