June 15, 2020 – Based on betting market odds, research house Morgan Stanley computed a 28% probability (as of June 5 data) of a Democratic “Blue Wave” in November – with Democrats assuming control of the Presidency and both chambers in Congress.
Since the issuance of the Morgan report titled “A Revised Guide to Economic Policy Paths and Market Impacts” on June 8, Biden has doubled his lead against President Trump to 8 points (from 4 points on June 5), based on the RealClearPolitics Betting Average index.
Some of the factors driving a Blue Wave include potentially strong turnout among Black voters and women, and suppressed turnout among White, independents and male voters. Further, high unemployment in battleground states like Michigan, Pennsylvania and Nevada could further tilt the electorate to voting Blue. Moderates may also view Joe Biden as a more trustworthy guardian for Obamacare and health programs in general.
Michael Zezas, Morgan Stanley’s Governmental and Municipal Finance strategist, wrote:
(A Blue Wave) yields the most proactive fiscal stimulus at the federal level. As our rates team has highlighted, this likely translates into steeper yield curves. Given the muni market’s historical underperformance in curve steepening environments, as negative convexity amplifies negative returns, translating into outflow cycles, we’d expect a bumpy path for munis initially. This would favor short duration and high credit quality positions. However, we would expect this underperformance to be short-lived, and unlock a meaningful opportunity for investors. A Democratic-led fiscal expansion is still likely accompanied by higher corporate and personal taxes, increasing munis tax value at a time when risk-free-rates are also higher
BuyMuni spoke with two New York-based strategists, who agreed that a Blue Wave could result in stronger performance, particularly for blue state credits.
“A $1T+ infrastructure bill could finally be reality, and perhaps Build America Bonds and of course greater Medicaid spending – all great for the Californias and New Yorks”, said the analyst who focused on state/local credits.
“Sadly…. for me personally…marginal income taxes will return to pre-TCJA levels, but as an offset the SALT deduction cap will likely be repealed. The impact of both tax actions translates to New York bond prices have roughly 20% upside“, said a midtown-based trader.
Contact Karen Bigelow at KBigelow@buymuni.com.
