Weekly Municipal Monitor—Election Day

Blog

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

Municipals Posted Positive Returns During the Week

The US muni yield curve moved 1 to 11 bps lower during the week. Municipals underperformed Treasuries in short maturities and outperformed Treasuries in long maturities. Technicals continued to be supported by robust municipal mutual fund flows. The Bloomberg Municipal Index returned 0.47%, while the HY Muni Index returned 0.72%. This week we highlight the outcomes and implications of last week’s election.

Technicals Continue to Be Supported by Robust Municipal Mutual Fund Flows

Fund Flows: During the week ending November 3, municipal mutual funds recorded $603 million of net inflows. Long-term funds recorded $569 million of inflows, high-yield funds recorded $1 million of inflows and intermediate funds recorded $184 million of inflows. Municipal mutual funds have now recorded inflows 76 of the last 77 weeks, extending the record inflow cycle to $154 billion, with year-to-date (YTD) net inflows also maintaining a record pace of $92 billion.

Supply: The muni market recorded $7.6 billion of new-issue volume during the week, down 10% from the prior week. Total issuance YTD of $396 billion is 5% lower from last year’s levels, with tax-exempt issuance trending 4% higher year-over-year (YoY) and taxable issuance trending 25% lower YoY. This week’s new-issue calendar is expected to increase to $8.6 billion of new issuance, despite the holiday-shortened week. The largest deals include $1.2 billion State of California General Obligation and $665 million District of Columbia General Obligation transactions.

This Week in Munis—Election Day

Last week’s elections were relatively quiet for the municipal market in terms of bond measures, but political outcomes in the New Jersey and Virginia state races highlight the changing political landscape that has the potential to influence local policy and progress on federal spending legislation that gained traction earlier this year.

Bond Measures

According to Bloomberg and IHS Market Data, the $27 billion bond measures on ballots were the lowest up for consideration since 2017, and $15 billion were approved by voters. A high concentration of proposed ballot measures were concentrated in funding school facilities in the post-pandemic environment. The subdued amount of bond measures could signal further new-issue supply limitations, which has contributed to net negative supply in recent years.

State Elections

Virginia observed the highest voter turnout since 1997 to elect Republicans across governor, lieutenant governor and attorney general posts. Virginia Democrats are also expected to lose control of the Commonwealth’s House of Delegates as Republicans are projected to win at least 50 seats. Meanwhile, Virginia’s Senate remains under Democratic Party control. Western Asset expects that a divided government would cause more political infighting, which usually means less is done in terms of resolving budgetary issues or pursuing new bonding initiatives.

New Jersey Democratic Governor Phil Murphy was a heavy favorite entering Tuesday’s race, but narrowly survived by just 1.5% of the vote (compared with Biden’s 16% margin of victory a year ago). Notably, Democratic State Senate President Steve Sweeney was voted out of office after holding the role since 2002. Voters in New Jersey expressed sensitivity against Murphy’s higher tax agenda, which could slow any momentum for the state to address its structural challenges, particularly related to elevated pension liabilities.

Federal Policy Implications

This year, Western Asset has anticipated that President Biden’s ambitious spending plans would be challenged by the divided political landscape. We expect federal and local legislators to take notice following Tuesday’s results; this could lead to diminished expectations around the scope of Biden’s agenda and higher taxes, which has bolstered demand for municipal debt this year.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").

Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.

These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.

Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.

Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.

Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.

These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.

Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and 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.