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MarketScape · 10.15.24

How the U.S. Election Might Impact Municipal Bonds

Municipal bond investors benefit from tax-exempt interest, and any post-election tax policy changes could affect how this advantage plays out in the future.

  • Fixed Income
  • Markets & Economy
  • Market & Investment Trends
  • Economic Insights & Trends

Key Points

What it is

We examine how the outcome of the upcoming U.S. election could influence municipal bonds, particularly in relation to potential tax policy changes.

Why it matters

As tax policies evolve post-election, opportunities in the municipal bond market may shift, potentially influencing how investors can leverage tax-exempt income for their portfolios.

Where it's going

Looking ahead, the municipal bond market will likely remain an option for tax-conscious investors, with post-election tax policies potentially dictating its direction.

The outcome of this November’s election could have a significant impact on the municipal bond market. One key reason is the potential for changes to the tax code. For municipal bond investors, the tax-exempt status of the interest they receive is a key benefit. Any shifts in tax policy after the elections may potentially impact this advantage, for those relying on tax-free income. Let’s take a closer look.

 

Municipal bonds are often a key investment choice for investors seeking tax-efficient income because the interest is exempt from federal taxes. This tax benefit becomes more appealing when the top marginal tax rate is high. As taxes rise, taxable bond investors see a larger portion of their income eroded by taxes, making municipal bonds comparatively more attractive. In essence, the higher the tax rate on taxable investments, the greater the relative benefit of holding municipal bonds, as they provide a reliable source of tax-free income.

 

The last major tax overhaul was the , but most of its provisions are set to expire in 2025. This means that whoever wins in November will likely be involved in negotiating a new tax bill next year. With federal deficits on the rise, there’s a chance we may see an increase in tax rates. In our view, this is more likely if Kamala Harris is elected, based on her public statements, and less likely if Donald Trump wins, given his public statements. In either case, the new president will need to negotiate tax policy with Congress to pass tax legislation. However, no matter who wins the presidency and the congressional seats in November, we see little chance that Congress would eliminate the municipal tax exemption, which dates back to the first tax code in 1913.

 

Tax rates matter to municipal bond investors, and any debates about future tax policy should be watched closely. 2025 is a pivotal year for potential tax changes, and so a tax rate increase could boost the appeal of municipal bonds. Regardless of who wins the election, we believe municipal bonds will continue to offer the valuable benefit of generating tax-free income. 

Main Point

What’s Ahead for Municipal Bonds Post-Election?

The outcome of November’s election could significantly impact the municipal bond market, especially with potential changes to the tax code. For investors, the tax-exempt status of interest is a key benefit, and post-election shifts in tax policy could affect this advantage.

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