skip navigation


Stay up to date on timely topics and market events. Subscribe to our Blog now.

November 10, 2020

Weekly Municipal Monitor—Election Outcomes

By Robert E. Amodeo, Sam Weitzman

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Municipals Rallied and Outperformed Treasuries

Municipals outperformed Treasuries, as Muni/Treasury ratios declined below 100% over the week. AAA municipal yields moved 3 to 15 bps lower across the curve. The Bloomberg Barclays Municipal Index returned 0.63%, while the HY Muni Index returned 0.71%. This week, we highlight election outcomes on state and local governments.

Municipal Supply and Demand Slowed During Election Week

Fund Flows: During the week ending November 4, municipal mutual funds recorded $954 million of outflows following four consecutive weeks of inflows, according to Lipper. Long-term funds recorded $888 million of outflows, intermediate funds recorded $120 million of outflows and high-yield funds recorded $260 million of outflows. Municipal mutual fund net inflows YTD total $26.3 billion.

Supply: The muni market recorded $1.4 billion of new-issue volume last week, down 92% from the prior week, attributable to the election week. Issuance of $416 billion YTD is 27% above last year’s pace, mostly driven by higher taxable issuance as tax-exempt issuance is just 2.5% above last year’s levels. Issuance is expected to remain light amid election uncertainty, with approximately $3.4 billion expected this week. Largest deals include $424 million State of Louisiana and $300 million taxable California Earthquake Authority transactions.

This Week in Munis: Election Outcomes

As highlighted in last week’s blog post, key state tax reform initiatives in Illinois and California failed to gain sufficient voter traction. However, Colorado was successful in passing proposition B. This will remove the Gallagher Amendment which has limited residential property tax collections, and we expect this will be a credit positive for local governments within the state. Elsewhere, a tax increase was passed in Arizona, increasing the state’s top marginal tax rate from 4.5% to 8.0%, which should increase the relative value of the tax-exemption of Arizona municipal debt.

Outside of tax policy, New Jersey, Arizona, Montana and South Dakota voters passed measures that will legalize the recreational use of marijuana. While the legalization of marijuana is often framed as a panacea for budget woes, incremental projected revenues typically comprise a relatively small proportion of state budgets, and we do not expect a material credit impact as a result of the legislation. S&P appears to agree, as the agency downgraded New Jersey to BBB+ from A- on Friday evening.

While the ultimate outcome of certain congressional seats remain unknown, a divided government appears a likely scenario of this election cycle. Under this scenario, we would expect more of the status quo from a tax policy standpoint rather than potential swift tax increases associated with a “Blue Wave.” Overall, we believe a divided government is neutral for municipal debt. While it may be more challenging to pass tax increases, we anticipate it would be just as difficult to overturn SALT deductibility limitations which have increased effective tax rates for wealthy earners in high-tax states.

Exhibit 1: Municipal Bond Yields and Index Returns
Explore Municipal Bond Yields and Index Returns.
Sources: (A) Muni yields: Thomson Reuters MMD; Treasury Yields: Bloomberg. As of 06 Nov 20.
(B) Bloomberg. As of 06 Nov 20. Select the image to expand the view.
Exhibit 2: Tax-Exempt and Taxable Municipal Valuations
Explore Tax-Exempt and Taxable Municipal Valuations.
Sources: (A) Bloomberg, Western Asset. AAA, AA, A, BBB Corporate Indices. After-tax yield assumes a top effective tax rate of 40.8%. As of 06 Nov 20.
(B) Bloomberg, Western Asset; Taxable Muni Index Corporate comparable used is the long corporate (ex. BBB) to better align credit quality and duration. As of 06 Nov 20. Select the image to expand the view.
© Western Asset Management Company, LLC 2021. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.