Midterm elections: Five factors for muni investors to watch
While the national news media focuses on different horse races for control of the U.S. Congress, municipal bond investors will bring a wider perspective to this year’s midterm elections.
Voters in states across the country will choose their next governors and weigh in on various ballot measures that are likely to affect how much municipalities are able to borrow and what yields may be available to municipal bond investors.
Here are the five factors we’ll watch as the midterm results come in:
1. Focus on governors’ mansions
A majority of states—36 in all—will hold gubernatorial elections on November 6. In a typical midterm cycle, the party of the current president usually doesn’t do well in gaining gubernatorial offices. So, we expect to see some Democratic victories in key governor’s races this year.
Each state has its own financial challenges, and many states are currently in strong financial positions. But others face wide-ranging financial pressures from infrastructure needs to underfunded pensions. State legislatures are wrestling with priorities: should they shore up pension problems first or focus on capital expenditures like infrastructure?
This may be less of a pressing question in states where pensions are on more solid ground, but in states in direr financial situations we may see capital projects pushed aside in favor of funding public sector pension. The federal government could provide a hand here, helping states lower the costs of infrastructure financing.
2. Four states to watch closely
Two of the more interesting governor’s races for municipal bond investors to watch are in Illinois and Connecticut. Both contests are closely watched as both states have weak municipal credits and are among the more troubled states in regard to state pension funding levels.
But Illinois and Connecticut face different paths going forward. In Illinois, the economy is doing relatively well. Consider what’s happening in Chicago: A number of Fortune 500 companies recently moved their headquarters into the city (i.e., Boeing, ConAgra, McDonald’s) and construction is booming. But the state government also went through a two-year budget battle between the Republican governor and the Democratic-controlled statehouse that led to a downgrade of Illinois’ bond rating.
If Democrats win Illinois’ top office, the party will have a supermajority in the state. That should allow Democrats to build enough consensus to tackle the state’s ongoing pension problems.
Connecticut, on the other hand, is facing both a political and economic impasse. Economic growth has been slow to recover to pre-recession levels. Business activity and job markets are anemic compared with other states. Adding political gridlock to their economic problems gives Connecticut lawmakers less room to maneuver.
Voters in California and Colorado have the opportunity to weigh in on several ballot measures that would green-light bond issuance for the funding infrastructure projects. Californians will choose whether the state can borrow up to $16 billion to pay for water system upgrades, hospital expansions and affordable housing projects. In Colorado, voters will have their say on funding road and bridge improvements through approximately $10 billion of bond issues plus a sales tax increase.
3. Will regional interests shift?
Citizens in four states—Idaho, Montana, Nebraska and Utah—will decide on statewide measures to expand Medicaid. These are four solidly Republican states where voters will weigh in on one of the core components of the Affordable Care Act (i.e., Obamacare). The outcomes of these initiatives will impact the bottom line performance of health care systems in these states.
Additionally, there are gubernatorial elections across the Midwest in traditionally strong Democratic states that flipped for Trump in 2016. In particular, we see the governor’s races in Michigan and Wisconsin as important for municipal bond investors to watch. Both states went for Trump in the presidential election but could put Democrats in the top statewide offices in the midterms.
There’s also interest in the New York governor’s race, where the incumbent governor Cuomo has a sizeable lead over his opponent. His margin of victory could tell us a lot about the split between the state capital, Albany, and NYC.
4. The House hangs in the balance
Municipal bond markets will also have an ear tuned to federal elections, where GOP victories in a majority of House races could spur further tax reform and another shot at repealing the Affordable Care Act.
Health care measures are often driven more by federal mandates than statehouse legislatures. If Republicans can hold their Congressional majorities and manage to repeal Obamacare, we’ll see an impact throughout the health care market, but especially in those states that have passed Medicaid expansion.
Democratic control of the House raises the potential for federal gridlock, but we see opportunities for bipartisanship, especially on issues like infrastructure that hold high appeal to broad constituencies. Cross-aisle agreement on big-picture projects like infrastructure is possible, as evident in the bipartisan bill signed by President Trump in October, authorizing increased funding for water system infrastructure.
5. What to expect after the midterms
As municipal bond investors, when we consider possible outcomes for the midterms, we assess how different results could impact a state’s market perception and bond ratings. Will the agenda of a new or re-elected governor, whom we consider essentially the CEO of the state, lead to potential upgrades or downgrades? That’s what influences the spread of municipal bonds, from those issued at the state level down to cities and counties on a more local level.
We ask two questions whenever we look at a municipal bond opportunity. First, how is the state and region doing economically? Second, will the political climate enable state office holders to positively utilize the economic activity they have?
As an example, consider the recent gubernatorial election in New Jersey. The state’s bonds performed well after voters installed a new Democratic governor, with the expectation that Governor Murphy could work more easily with the Democratic-led state legislature and build consensus to tackle some of New Jersey’s thornier financial issues.
This scenario could repeat in states like Illinois, where one-party control of the governor’s mansion and the statehouse could pave the way for solutions to long-standing funding issues, improving the state’s municipal bond outlook.
Looking for more? Download the Muni360 Report Now.A comprehensive view into the municipal market from MacKay Municipal Managers™. The minds behind munis.
Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.
New York Life, New York Life Investments, and its affiliates do not provide legal, accounting, or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting, and tax advisors.
All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.
Mutual funds are subject to market risk and will fluctuate in value.
A portion of a municipal fund’s income may be subject to state and local taxes or the Alternative Minimum Tax. Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner.
Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers, and the possibility of future tax and legislative changes, which could affect the market for and value of municipal securities. Such uncertainties could cause increased volatility in the municipal securities market and could negatively impact the Fund’s net asset value and/or the distributions paid by the Fund. Securities purchased by the Fund that are liquid at the time of purchase may subsequently become illiquid, due to events relating to the issuer of the securities, market events, economic conditions, or investor perceptions.
In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they have a low risk of default. Investment grade is determined based on a relative scale by credit rating agencies such as Standard & Poor’s and Moody’s. Such credit ratings express the ability and willingness of a borrowing organization to repay its debt and are based on many financial and economic indicators that influence the borrower’s creditworthiness. Securities with a rating of BBB or above from Standard and Poor’s or Baa3 or above from Moody’s are considered investment grade.
Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.
Credit ratings agencies, such as Moody’s, Standard & Poor’s, and Fitch Ratings, have letter designations (such as AAA, B, CC) which represent the quality of a bond. Moody’s assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C, with WR and NR as withdrawn and not rated.
Standard & Poor’s and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D.
Active management is the use of a human element, such as a single manager, co-managers, or a team of managers, to actively manage a fund’s portfolio. Active management strategies typically have higher fees than passive management.
Municipal yield curve – Generally, an “AAA” curve is derived from market estimates of yields for bonds with the highest ratings levels in the. municipal market. The base interest rate in the municipal market — that is, the rate against which municipal securities. are most often compared — is the yield on a “AAA” benchmark issue or index.
A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
For more information about MainStay Funds®, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing.
New York Life Investments engages the services of MacKay Shields LLC, an affiliated, federally registered advisor, to subadvise several Funds. New York Life Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds® are managed by New York Life Investment Management LLC and distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.