Municipal Bond News 11/4/24

Election Scenarios Grip Bond Markets…Slower Muni Bond Sales…State Governance Changes…Voters to Decide Bonds, Taxes…Illinois Mulls Millionaire Tax…New Political Party Enters Island’s Political Fray…Chicago Mayor Seeks Property Tax Hike…Fed Rate Cut…

Election Scenarios Grip Bond Markets…Growing speculation around election outcomes has pushed muni bond yields to the highest in four months. The policy proposals of Vice President Harris could add $4.4 trillion to the federal deficit, and former President Trumps’ policies could boost the deficit by a steeper $7.8 trillion per the Committee for a Responsible Federal Budget. The bond markets’ sell-off in October appears to be based on expectations of a Republican sweep, which may be reflected to some extent in currently elevated yields. In this context, a victory for Harris could potentially trigger a rally in the bond market. A divided Congress could favor bonds, as it could help to moderate deficit expansion and fiscal stimulus. However, predicting how the bond markets will respond is nearly impossible. Currently, volatility in bond markets is at its highest this year, exceeding the volatility seen in the lead-up to the elections in 2020 and 2016. Amid volatility, sophisticated long-term investors will be ready to act upon potential opportunities to add tax-free income.

Muni Bond Sales Lowest In A Year…Fewer muni bond offerings are expected in November’s primary market. The slowdown comes after states and local governments accelerated muni bond sales recently. In election years, muni bond supply tends to show a similar pattern. Additionally, October’s volatile market conditions have kept bond issuers away from the primary market. Faced with a surge in bond yields last month, refinancing of taxable Build America Bonds has taken a back seat after surging earlier this year. October’s primary market saw $63 billion of muni bond offerings, the most in four years. However, November’s bond calendar currently shows fewer than $5 billion worth of muni bond sales, the least this year. With all eyes on the election, there are very few muni bond offerings next week.

State Governance Changes…11 U.S. states and two U.S. territories will vote for a governor on November 5. At present, there are 27 Republicans and 23 Democratic governors. At the state level, 5,808 legislative seats out of 7,386 will be elected this week. Currently, most U.S. states have the same party controlling both houses of legislature and the governor’s office. Along with the presidential election, the balance of power at the state and local government level impacts the finances of muni bond issuers.

Voters To Decide Bonds, Taxes…New bonds, taxes, transportation, schools, and a host of state and local government measures are on the November 5 election ballot. At least three dozen ballot proposals aim to issue bonds and/or raise taxes. The largest bond measures are for California schools. Over 300 transportation-related ballot measures could collectively raise $70 billion worth of new revenue for states and local governments. Sales tax hikes to fund public transit are on the ballot in fast-growing areas such as South Carolina, Georgia, Columbus, OH and Nashville, TN. State-related ballot measures have garnered political contributions worth over $1 billion. On November 5, voters in 41 U.S. states will decide upon 146 statewide ballot measures.

Illinois Mulls Millionaire Tax…This week, voters across Illinois will express their opinions on a ballot measure concerning a proposed 3% tax on annual incomes exceeding $1 million. The revenue generated from this tax would be earmarked for reducing property taxes. In 2020, voters rejected Governor Pritzker’s plan for progressive taxes on Illinois incomes. Since then, the most prominent opponent of progressive taxes, billionaire Ken Griffin, has relocated to Florida. The latest measure ballot measure is nonbinding, but it opens the door to a new debate on raising taxes on the wealthy.

New Puerto Rico Political Party Gains Momentum…A new coalition party, ‘Alianza’ or ‘Puerto Rican Independence Party’, is gaining momentum against the ruling New Progressive Party (‘NPP’), leading in Puerto Rico’s gubernatorial election, also on November 5. For the last seven decades, either the NPP and Popular Democratic Party have governed the Island. This election marks the first time since 2017 that a sitting governor, Pedro Pierluisi (‘NPP’) is not on the ticket for the Island’s top office. Voter turnout in Puerto Rico has been at a record low since 2016. A federal oversight board has been in charge of Puerto Rico’s finances for the last eight years.

Chicago Mayor Seeks Property Tax Hike…Mayor Johnson is proposing to increase Chicago’s property tax levy by about 4%. This is estimated to bring in an additional $300 million to help close a nearly $1 billion spending gap in 2025. The Mayor also plans to draw a record $570 million surplus from the city’s tax-increment financing districts to help balance the budget. Additionally, higher taxes on alcohol and vacant position cuts are also sought. Notably, the Mayor had campaigned against a property tax increase tied to inflation which was implemented by his predecessor Lori Lightfoot. Without the property tax hike, the city would need to cut its workforce by 17%. Presenting a $17.3 billion spending plan for Fiscal 25, the mayor said, “The choices we made to present a balanced budget have certainly been sobering.”

Fed Rate Cut…There are near certain odds of a 25-basis point rate cut this week. A similar move is expected next month. However, the outlook heading into 2025 hinges on the results of the presidential and congressional votes, which will shape policies from taxes to tariffs and the economy for years to come.

Compare 30-Year taxable U.S. Treasury yield 4.48% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.86% “AA” 4.16%; “A” 4.32%. For investors in the 35% tax bracket, a 3.8% tax-exempt yield is equivalent to a 5.85% taxable yield. Top-rated long-term tax- free bonds yield 86% of comparable taxable U.S. Treasuries.