Municipals were regular Tuesday as market participants mostly sat on the sidelines to await the outcomes of the election and Thursday’s Federal Open Market Committee rates decision, each of which is able to likely cause volatility within the near term and have repercussions on economic and monetary policy in the long term. U.S. Treasuries were mixed and equities were up near the close.
While the expectation for a Thursday Fed rate cut is well-defined, the election results were far less so, though participants do have certain expectations for the market reactions to varied outcomes.
“A victory for former President Trump is more 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 established order,” said Erik Weisman, chief economist and portfolio manager at MFS Investment Management.
In a red sweep, “priorities reminiscent of lower corporate taxes can be more difficult from a requirement perspective for tax-exempt municipals,” J.P. Morgan strategists said, led by Peter DeGroot.
“Betting markets” expect a 48% probability of a Republican sweep, “suggesting that investors see a powerful 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 can be difficulty to pass “transformative laws,” making the extension of expiring Tax Cuts and Jobs Acts provisions hard and leaving full expiration of the person mandates as a “very real possibility.”
Taxes would increase, but that may 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 can be much more bullish for relative value within the tax-exempt market,” J.P. Morgan strategists said.
The fixed-income market in recent times has been largely driven by the Fed’s monetary policy somewhat than which administration is in place, said Andrzej Skiba, head of U.S. Fixed Income for RBC Global Asset Management.
Nonetheless, that would change if Trump’s proposed trade policy goes into effect, which might have a “negative impact” on the bond market, he said.
“A Trump win shall be really bad for fixed income and might unwind quite a lot of the bullishness” the markets have had, Skiba said.
Trump has reiterated his intention to extend tariffs on “every trade partner,” including China, he said.
The ten% tariffs are a “big deal” because 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 is not going to be ready to chop rates even when the economy is slowing down and that could be a toxic mix for fixed income,” he said.
“The fate of fixed income almost at all times lies with what’s going to occur with inflation,” Skiba said. “One percent doesn’t sound like so much, but from a Fed perspective, it could make all of the difference between having the ability to cut rates or not.”
Bryce Doty, senior vice chairman and senior portfolio manager at Sit Investment Associates, said the bond market is “behaving as if if Trump wins, the Fed shall be less more 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 rates of interest were historically low and the labor market was very robust when Trump’s policies were in place. People were in a position to afford increasingly. Now they reside on less and fewer.”
“An even bigger concern is the burgeoning national debt and that interest expense is surpassing our defense budget,” Doty said, noting deficits are more likely to remain “high” for each candidates.
“Nonetheless, Trump’s budget will, at the very least, be higher at boosting productive economic growth that may help generate more tax revenue,” Doty said.
The rising national debt puts the Fed in a “pickle” because it contends with either bringing down rates of interest to save lots of the US money or keeping rates higher than usual to “attempt to offset the inflationary impact from massive government spending,” he said.
Fed policy will attempt to search out a “middle ground” and only cut 25 basis points at each its November and December meetings, Doty said.
AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 2.80% and a pair of.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 at least one basis point: 2.91% (unch) in 2025 and a pair of.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 a pair of.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 a pair of.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 2-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) on the close.
Primary to come back
The Virginia Small Business Financing Authority (Aaa///) is about to cost Thursday $125 million of Pure Salmon Virginia Project environmental facilities revenue bonds, serial 2052. HilltopSecurities.
Competitive
Fort Lauderdale (Aa1/AA+//) is about 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.