If anyone says they know how the recent election results will affect the municipal bond market, ignore them.
There are many more questions than answers, and despite the wave of guesses on how the new president will affect everything from inflation to infrastructure spending, muni investors seeking guidance from conjecture and rhetoric will be sorely disappointed.
Consider inflation, the bane of fixed-income investors. Conventional wisdom posits that the election has ushered in a sharp rise in inflation expectations, weakness in Treasury bond prices, strength in commodity prices and a pivot out of municipal bond funds.
A closer look, however, reveals a more complicated picture.
Indeed, the streak of net inflows into municipal bond mutual funds was snapped in October – but only after an astonishing 54 weeks that brought in more than $54 billion of net new money. It was the second longest streak since Lipper began tracking this data in 1992, behind only the 63-week run from 2009-2010.
A harbinger of inflation? Hardly. Trees, as they say, don’t grow to the sky.
Perspective pays for muni bond investors
Further, as a recent Barron’s article pointed out, Treasury bond prices, as measured by the iShares 20+ Year Treasury Bond exchange-traded fund, did indeed fall after the election. But alas, it had been slipping since July, and the current decline falls within what would be a normal correction expected in a rising market.
A similar argument could be made for copper, considered an economic indicator. While the price of copper has increased dramatically over the past few weeks, the rise may be considered in line with expectations since the 2010 peak and seems to indicate a “temporary awakening, not a sea change from bear to bull.”
And gold, regarded as the prime hedge against inflation? It’s been in a steady decline all summer, which has accelerated further since the election.
Opportunity now for muni bond investors
The election of a new president provides a limitless opportunity for prognostication: Will the president try – and succeed – in launching new spending initiatives? Will Congress take aim at the muni tax exemption? Where are tax rates going, if anywhere?
At this point, no one knows. And those of you who’ve read our articles over the past several years might also join us in our skepticism regarding the soundness of these newest predictions.
Let the pundits predict. Fixed-income investors succeed when they decline to stake their money on what the president and Congress may or may not do. They profit by keeping their stream of tax-free income flowing.
