2021 Municipal Bond Market Outlook

Oppenheimer has just released its 2020 Municipal Bond Market Recap and 2021Outlook. The comprehensive report discusses the technical drivers of last year's performance amid a pandemic-driven national economic shutdown of historic proportion. Certainly, 2020 ended on a positive note given the development and distribution (albeit multi-layered) protocols for multiple vaccines and the advancements made with respect to broadening the application of therapeutics. Let’s concede the fact that the duration and performance of the economic recovery will be closely aligned against the measure of a successful roll-out achieved with the newly minted vaccines.  2020 turned out to be a very good year for Munis despite the market disruption and the pandemic-driven economic suspension’s impact on a broad range of muni sectors and credits. As munis rebounded from the March sell-off, helped in large part by the decisive policy intervention from the Fed and Congress, product demand resumed with successive positive mutual fund flows. From that moment forward, muni technicals have driven performance and provided some social distancing from Treasury market behavior. Munis are well-positioned entering 2021 against a backdrop of compelling market technicals. Similar to 2020, this unique technical environment with demand as an unwavering constant should be a key driver of performance in 2021. January 2021 may bring about a more typical “January Effect” with light weekly calendars as extended pent-up supply came about in 2020, and we believe that performance for the month begins from a good place.

The Georgia Senate race is a pivotal development. We would think that a blue sweep would only reinforce the legitimacy of a Biden win. If both Senate seats in Georgia go blue, this would bring about a 50/50 split for voting purposes and Vice-President-Elect Kamala Harris would cast the majority vote. We would posit that under this scenario, Joe Biden’s cabinet and judicial nominees would find an easier path to confirmation. We would also suspect that there would be a greater likelihood of passage for some of the President-Elect's domestic agenda items, including more expensive fiscal relief legislation with more funding for state and local governments, mass transit and health care. We believe that a Democratic Congress would be more inclined to extend the moratorium on federal student loan payments and ESG and infrastructure initiatives would likely have more support with broader national implications under Democratic control.

Having said this, there may be questionable support for some of the more debatable items such as tax increases given a slim Democratic majority and concern over the implications for our economic recovery. A result that keeps the Senate in GOP hands would likely dilute the chances of higher taxes (income/capital gains) and tighter regulation, especially a Biden campaign pledge of lifting the corporate tax rate to 28%. “Green” subsidies and associated tax credits would become less of a priority with Republicans in control. We suspect that manufacturing subsidies may have bi-partisan appeal as both parties have important constituents in this space and a meaningful infrastructure package may have support from both sides of the aisle, although with a probable different focus.

While Republicans seem fundamentally opposed to repealing the SALT deductibility limits, we are not so sure that there would be sufficient support to lift the restrictions as a Democratic majority in the Senate would be slim at best, and while House Speaker Nancy Pelosi will retain her gavel for another term, her own majority has been curtailed. There will, however, likely be continued lobbying efforts from various public finance organizations, but we could expect a number of competing and priority bills that may dilute such efforts and there would need to be a larger legislative conduit that would include any SALT relief package

For the most part, the 2020 election cycle should have minimal effects upon the muni market from a technical perspective as we are not factoring further major tax changes into our strategic guidance. We believe that politics will likely take an agnostic view of munis without talk of further assaults on the tax-exemption and/or issuing authority for certain types of bond structures. However, demand for tax-efficient and quality and diversification attributes may create more allure if greater tax exposure potentially confronts upper income investors. We suspect that a Biden administration will remain focused on the pandemic and the economic recovery and in doing so, we anticipate a more fractured and fragmented political landscape.

For a complete copy of the 2021 Municipal Bond Market Outlook, please contact your Oppenheimer Financial Professional.