Municipals were steady Tuesday as market participants mostly sat on the sidelines to await the results of the election and Wednesday’s Federal Open Market Committee rates decision, both of which will likely cause volatility in the near term and have repercussions on economic and monetary policy in the longer term. U.S. Treasuries were mixed and equities were up near the close.
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“A victory for former President Trump is likely to be viewed as ushering in a more inflationary environment, whereas a win for Vice President Harris will probably be seen as closer to the status quo,” said Erik Weisman, chief economist and portfolio manager at MFS Investment Management.”
In a red sweep, “priorities such as lower corporate taxes would be more challenging from a demand perspective for tax-exempt municipals,” J.P. Morgan strategists said, led by Peter DeGroot.
“Betting markets” expect a 48% probability to a Republican sweep, “suggesting that investors see a strong likelihood of unified GOP control,” Komson Silapachai, a partner at Sage Advisory, said in an Oct. 29 report.
“The runner-up most probable scenario: one where Kamala Harris wins the presidency but lacks congressional support is at a 26% probability,” Silapachai said, while a Trump presidency without full congressional control is at a 15% likelihood.
Under a divided Congress, J.P. Morgan strategists noted there would be difficulty to pass “transformative legislation,” making the extension of expiring Tax Cuts and Jobs Acts provisions hard and leaving full expiration of the individual mandates as a “very real possibility.”
Taxes would increase, but that would be “accretive” to muni demand, they said.
The probability of a full Democratic sweep, at an estimated 12%, would mean “expected higher taxes on corporations and top-bracket filers would be even more bullish for relative value in the tax-exempt market,” J.P. Morgan strategists said.
The fixed-income market in recent years has been largely driven by the Fed’s monetary policy rather than which administration is in place, said Andrzej Skiba, head of U.S. Fixed Income for RBC Global Asset Management.
However, that could change if Trump’s proposed trade policy goes into effect, which would have a “negative impact” on the bond market, he said.
“A Trump win will be really bad for fixed income and can unwind a lot of the bullishness” the markets have had, Skiba said.
Trump has reiterated his intention to increase tariffs on “every trade partner,” including China, he said.
The 10% tariffs are a “big deal” as it could add 1% to inflation, Skiba said, and the 1% addition to 2025’s inflation numbers would mean an end to Fed rate cuts.
“With higher tariffs, the fed will not be in a position to cut rates even if the economy is slowing down and that is a toxic mix for fixed income,” he said.
“The fate of fixed income almost always lies with what will happen with inflation,” Skiba said. “One percent doesn’t sound like a lot, but from a Fed perspective, it could make all the difference between being able to cut rates or not.”
Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates, said the bond market is “behaving as though if Trump wins, the Fed will be less likely to cut rates.”
Unlike other market participants, Doty disagrees that the “economic strength” of Trump’s policies and the fear that tariffs will increase inflation would dissuade the Fed from further rate cuts.
He notes that “inflation and interest rates were historically low and the labor market was very robust when Trump’s policies were in place. People were able to afford more and more. Now they are living on less and less.”
“A bigger concern is the burgeoning national debt and that interest expense is surpassing our defense budget,” Doty said, noting deficits are likely to remain “high” for both candidates.
“However, Trump’s budget will, at least, be better at boosting productive economic growth that will help generate more tax revenue,” Doty said.
The rising national debt puts the Fed in a “pickle” as it contends with either bringing down interest rates to save the United States money or keeping rates higher than usual to “try to offset the inflationary impact from massive government spending,” he said.
Fed policy will attempt to find a “middle ground” and only cut 25 basis points at both its November and December meetings, Doty said.
AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.80% and 2.64% in two years. The five-year was at 2.65%, the 10-year at 2.97% and the 30-year at 3.83% at 3 p.m.
The ICE AAA yield curve was bumped up to one basis point: 2.91% (unch) in 2025 and 2.66% (-1) in 2026. The five-year was at 2.65% (-1), the 10-year was at 2.96% (unch) and the 30-year was at 3.74% (unch) at 4 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.87% in 2025 and 2.70% in 2026. The five-year was at 2.66%, the 10-year was at 2.96% and the 30-year yield was at 3.75% at 4 p.m.
Bloomberg BVAL was unchanged: 2.82% in 2025 and 2.63% in 2026. The five-year at 2.67%, the 10-year at 2.98% and the 30-year at 3.77% at 4 p.m.
Treasuries were mixed.
The two-year UST was yielding 4.192% (+3), the three-year was at 4.149% (+1), the five-year at 4.163% (+2), the 10-year at 4.276% (-1), the 20-year at 4.558% (-3) and the 30-year at 4.439% (-3) at the close.
Primary to come
The Virginia Small Business Financing Authority (Aaa///) is set to price Thursday $125 million of Pure Salmon Virginia Project environmental facilities revenue bonds, serial 2052. HilltopSecurities.
Competitive
Fort Lauderdale (Aa1/AA+//) is set to sell $45.575 million of water and sewer revenue bonds, Series 2024A, at 11 a.m. Wednesday, and $81.38 million of water and sewer revenue refunding bonds, Series 2024B, at 11:15 a.m. Wednesday.