After the election of Donald Trump as the next U.S. president, plenty of asset classes rallied, but bonds and fixed income ETFs were not among them.
Additionally, more investors are expecting the Federal Reserve to begin another round of interest rate hikes as soon as December.
Treasurys have been buoyed by a Federal Reserve that has consistently passed on raising interest rates this year. There are some obvious fundamental factors that bode well for U.S. debt ETFs, namely a slew of negative interest rate policies throughout the developed world, which make the low yields on U.S. bonds look all the more attractive.
However, some bond market analysts and participants are concerned about the impact a Trump presidency will have on municipal bonds.
The tax-exempt muni market, including ETF, has been hauling in new assets at a rapid clip this year as investors continued to pile into the fixed-income market without the Federal Reserve signalling higher interest rates anytime soon. The Fed left rates unchanged Wednesday and signaled it still planned on two rate hikes this year, despite slowing economic growth.
Popular municipal bond ETFs include the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), VanEck Vectors High Yield Municipal Index ETF (NYSEArca: HYD) and SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB).
“Municipal bonds have seen softer bids as well, in sync with their Treasury peers, in a relationship that is not uncommon. The incoming administration has put tax cuts at the top of its agenda, which could lessen the appeal of tax-advantaged investing. What’s more, we could see heavy selling if Congress passes a cap on the tax exemptions allowed for municipal income,” according to a Delaware Investments note posted by Amey Stone of Barron’s.
Municipal bonds continue to experienced robust demand from U.S. investors as reliable source of yield, especially among taxable accounts due to the debt securities’ favorable tax-exempt status.
“It’s fair to say that this is one of the bigger possible threats to the asset class. We think municipals will see consistent bids eventually. It’s likely they will indeed find a steady level when proposals for a new tax code are better understood, which will probably be some time next year,” according to the Delaware Investments note cited by Barron’s.
iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB)
