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Muni-Bond Sales To See Slowdown After November’s Midterms

The results of the Nov. 8 midterm elections will make waves in the $4 trillion municipal bond market.

An employee clears asphalt from a manhole cover while paving a highway in Illinois.
An employee clears asphalt from a manhole cover while paving a highway in Illinois.

The results of the Nov. 8 midterm elections will make waves in the $4 trillion municipal bond market, one of the most politically exposed asset classes.

With 36 governor seats up for re-election, states and localities will likely issue less debt through early 2023, which is already a typically quiet time for the market, according to Vikram Rai, the head of Citigroup Inc.’s municipal-bond strategy group.

“Issuance gets delayed slightly, issuance doesn’t go away it just gets pushed out a bit,” Rai said in an interview. “When the new administration takes over it takes them some time to get used to the office and get their act together.”

Across states where the governor was newly elected, total general-obligation bond sales in the first three months of the governor’s term dipped 51% from the annual average for that period, Citi said in a note released on Monday. When an incumbent was re-elected, issuance for that same time dipped 24%.

While those trends apply to both political parties, when governorships change parties, localities issue more debt in the long-term, according to Citi. In 79% of cases, a change in the governor’s party resulted in an increase in debt-per capita over the ensuing four years, the note said.

There are 36 governor seats up for grabs, with the incumbents leaving their seats in 28 states -- 20 of those contested seats are currently held by Republicans and 16 by Democrats. Republicans will have opportunities to take offices away from Democrats in five key battleground states -- Arizona, Michigan, Nevada and Wisconsin and Pennsylvania.

Read more: Five US States Will Decide If the 2024 Election Can Be Stolen

On top of the midterms, there’s also the January effect, where muni sales are typically light, Rai said. Those two events create a temporary imbalance, he said, adding that the market should return to normal by March. 

Debt sales tumbled this year thanks to Federal Reserve interest-rate hikes. States and cities have issued about $320 billion of new long-term munis this year, a 17% drop from the same period of 2021, according to data compiled by Bloomberg. But muni strategists at Bank of America Corp. project state and local-government debt sales will rebound to a record $500 billion in 2023. The bank expects $380 billion of new offerings for infrastructure projects and $120 billion for refinancing. 

Meanwhile, investors have pulled about $1.8 billion from municipal-bond mutual funds during the week ended Oct. 26, according to Refinitiv Lipper US Fund Flows data. The loss follows last week’s $2.6 billion outflow and marks the 12th straight week of withdrawals. 

“Political shifts at the state or local level can more directly influence revenue and spending priorities, but policy shifts usually take time to implement, allowing issuers time to adjust their budgets,” a report released by S&P Global ratings on Thursday said. 

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