(Bloomberg) -- Municipal bonds plummeted on Wednesday after voters elected Donald Trump as US president. The move followed a rout in US Treasuries, which sold off over concerns that Trump’s policies will widen an already bloated budget deficit and cause inflation to surge.
Benchmark municipal-bond yields jumped as much as 16 basis points as of 4 p.m. New York time.
“A Trump win signals to the market that some proposed policies have a chance at sunlight, many of which could re-ignite inflation,” said Eric Kazatsky, senior US municipals strategist for Bloomberg Intelligence. “US Treasuries are speaking that fact to the market and dragging munis along for the ride.”
Fixed income investors appeared concerned over the possibility for Trump policies to rekindle an inflation spiral that the Federal Reserve was beginning to tame in the wake of the pandemic. Investors of state and local government debt tend to take their cues from the Treasury market, with munis often moving in the same direction as federal securities.
Many governments chose to accelerate their borrowing before the election, and the market saw an influx of sales in October. This week, however, the primary calendar for munis is all but empty, with just a handful of deals that were issued Wednesday.
Lyle Fitterer, co-lead of the municipal sector at Baird, said he expects new issue supply to initially be muted, but sales should come back given the immense infrastructure needs across the US.
“Ultimately the president is going to have an impact and his policies are going have an impact, but from a longer-term perspective, the broad US economy is a big ship and it takes a lot to turn that ship,” he said.
In the day following the presidential election, the Denton County Levee Improvement District No. 1 in Texas, sold $8.1 million of debt to finance flood control improvements, including the replacement of storm-water pumps.
The district received a slightly higher rate than expected but one that could still be managed, Bill Blitch, the district’s financial adviser said. “There’s always a chance that political events will modify the bond market,” he said.
Selloff
Yields on municipal bonds due in three decades rose 15 basis points to 3.91%, according to data compiled by Bloomberg. That move is slightly more muted than the rout in comparable Treasury securities, the data show.
A Trump victory and the potential for a Republican majority in Congress could limit the demand for municipal bonds if taxes are reduced, analysts at JPMorgan Chase & Co. wrote in a research note published Wednesday.
In a Red-sweep scenario, which is still uncertain, “priorities such as lower corporate taxes would would be a negative for demand for tax-exempt bonds,” the group led by Peter DeGroot wrote.
Such a Republican majority may renew threats to the tax-exemption for municipal bonds, a key feature of the asset class. Earlier in the election cycle, strategists warned that eliminating the break could be one way to generate revenue necessary to offset Trump’s tax-cut policies.
“We worry the municipal tax exemption could become a target to pay for all of these tax cuts, said Abby Urtz, head of product strategies and economics at FHN Financial.
--With assistance from Amanda Albright and Martin Z. Braun.
(Updates market data and adds comments from financial adviser starting in second paragraph.)
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