1) Our Perspective
THE ELECTION AND MUNIS - NOVEMBER 2016
Ronald Schwartz, CFA
Managing Director,
Senior Portfolio Manager,
Tax-Exempt
Ron is a Senior Portfolio
Manager focused on the TaxExempt Strategies. He has
worked in the investment
management industry since
1982. Ron received a B.A. in
Business Administration from
Adelphi University and is a CFA
Charterholder and a member of
the CFA Society of Orlando.
The Republican Party was a clear winner on November 8th by taking the White House,
maintaining control of Congress, and now leading the governorship of 33 states (the most in 94
years). Exhibit 1 below shows the significant decline in Democrats since 2008. The Trump election
is clearly a potential paradigm shift for the U.S. economy and asset markets, and until there is
greater clarity surrounding budget and policy priorities in the coming weeks and months, market
volatility will likely remain high. At this point, we believe the election impact on the municipal
market will surround three key policies: tax reform, repeal of the Affordable Care Act (ACA), and
an increase in domestic infrastructure spending.
Exhibit 1: Change in Number of Democrats Since 2008
20%
10%
0%
-10%
Senate -10.2%
-20%
House -19.3%
Legislatures -20.3%
-30%
Governors -35.7%
-40%
2008
Scott Andreson
Director, Municipal Research
Scott is the Director of Municipal
Research for Seix Investment
Advisors. He has more than 17
years of investment experience.
He earned his MPA from USC
and is a current officer of the
National Federation of Municipal
Analysts.
CONTRIBUTORS
Dusty Self
Managing Director,
Senior Portfolio Manager,
Tax-Exempt
Phillip Hooks, CFA
Vice President,
Municipal Credit Research
2009
2010
2011
2012
2013
2014
2015
Source: House.gov, Dr. Carl Klarner, Ballotpedia, Statista
Tax Reform
Tax reform will likely be one of the main public policy issues in 2017, as both President-Elect
Trump and House Speaker Ryan have repeatedly called for a lower and simpler tax code. The
probability of tax reform has clearly increased with Republican control of Congress and the White
House. The Trump tax policy plan is to lower the corporate rate to 15% and the highest personal
income rate to 25%, while Ryan’s plan would lower the corporate rate to 20% and highest
personal rate to 33%. Either tax policy, if enacted, could reduce overall demand for tax exempt
bonds. Tax reform has historically been difficult to accomplish and while the GOP does not have
the 60 votes in the Senate to stop Democratic filibusters, it could possibly use budget
reconciliation with just 51 votes to pass measures.
2) Our Perspective
THE ELECTION AND MUNIS - NOVEMBER 2016
It’s important to note that Trump’s tax plan (unlike the
Clinton plan) does not mention the municipal tax
exemption. Even if the personal income tax rate is
lowered, there is no correlation between municipal yields
and the top marginal tax rate. Since 1980, the top
marginal tax rate has fluctuated from 70% in 1980 to
28% in 1988, and municipal rates have trended down
with Treasury rates with no change in demand for tax
exempt bonds. The most recent tax cuts of 2001 and
2003 did not impact muni rates at all (see Exhibit 2).
Finally, as we have said in the past, over 75% of the
country’s infrastructure has historically been funded by
municipal bonds, which will remain a strong headwind
against any tax reform that negatively impacts the value
of tax exemption going forward.
Exhibit 2: 10Yr AAA MMD Yield Have Followed 10YR UST Yields
Downwards and Show No correlation with the Marginal Tax-Rate…
Source: Citi Research
Infrastructure Finance
President-elect Trump envisions a $1.0 trillion infrastructure plan over 10 years that will be funded through deficit neutral tax
credits for equity investment in infrastructure projects supplemented by federal subsidized loans. Overall, the anticipated
increase in infrastructure funding is good for economic growth and public finance credit quality. Trump’s proposal is not likely to
increase the amount of municipal bond supply as the focus is on tax credits for private companies.
There were approximately $70 billion of municipal bond
proposals on the ballot this election, the largest since
2006, when about $82 billion went before voters. Just
over $60 billion of bonds were approved by voters with
the largest debt issues in California and Texas. The
uptick in borrowing is a signal that the spirit of austerity is
ending among local governments and that voters
recognize the need to fund infrastructure. New issue
supply is likely to increase, but the market should be
able to handle it as refunding issuance is likely to decline
as many callable bonds have already been advanced
refunded over the past two years.
Exhibit 3: Bond Ballot Measures Tend to Be Higher in Even Years
Source: Bloomberg
3) Our Perspective
THE ELECTION AND MUNIS - NOVEMBER 2016
Repeal of ACA is Negative for Hospital Bonds
Republicans are committed to “repealing and replacing” ACA and we believe the election is highly likely to have a negative
effect on the tax exempt hospital sector. In a recent 60 Minutes interview, Trump said he intended to immediately repeal
ACA. Since the election, we have seen hospital credit spreads widen out significantly as repealing or scaling back ACA
would reduce revenues for hospitals. We have an underweight recommendation to the hospital sector and we expect the
$250 billion in hospital debt to continue to underperform over the near and medium term.
The assertions in this perspective are Seix Investment Advisors’ opinion.
Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the
potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally,
a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local
taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful.
This information and general market-related projections are based on information available at the time, are subject to change without notice, are for
informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for
individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not
intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or
conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix
Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their
specific financial needs and goals before making any investment decisions.
Past performance is not indicative of future results.
©2016 Seix Investment Advisors LLC. Seix Investment Advisors is a registered investment adviser with the SEC and a member of the RidgeWorth Capital
Management LLC network of investment firms.