The Top Five: 2022 Muni Market Outlook
What does the remainder of 2022 have in store for the municipal market? Here are our top five takeaways from our conversation with Tom Tzitzouris, Strategas’ Head of Fixed Income Research.
Takeaway No. 1: Democrats seem prepared to take one final shot at passing President Biden’s signature legislation addressing social policy, healthcare and climate.
These measures could have a considerable impact on the municipal market – if it ever makes it through Congress. It didn’t have enough votes to pass through the Senate in December 2021, and it will need significant revisions to pass in 2022.
Takeaway No. 2: Individual provisions within Build Back Better could still see the light of day.
An expansion of the SALT deductions, advanced refundings, an increase of bank-qualified debt and a direct-pay bond program all existed in previous drafts of the bill and had some congressional support. Keep in mind that a main financing mechanism of the legislation imposes a surtax on high-income individuals.
Takeaway No. 3: Expect a far less accommodative Fed in 2022.
At the beginning of the year we were forecasting up to four rate hikes – now we anticipate seeing as many as 10, with up to 250 basis points of rate increases, as the Federal Reserve tries to tamp down inflation without pushing the country into recession. As expected, the Fed ended its bond-buying program in March and could explore a balance sheet reduction as soon as May, which could cause long bond yields to inch lower by the middle of Q3. Time is running out for municipal borrowers looking to take advantage of comparatively low interest rates.
Takeaway No. 4: The November 2022 midterms should cause a spike in volatility.
Midterm elections in November mean candidates will start campaigning in July. Any legislation affecting the muni market, including the remnants of Build Back Better, will have to happen before then or not at all. As the political environment gets more volatile, expect borrowing costs to rise across the curve.
Takeaway No. 5: Taxes will likely go up if Congress enacts a slimmed down version of Build Back Better.
Any new spending will likely be offset with tax increases and spending cuts. The latest version of the bill imposed surtaxes on single taxpayers making $5 million or more. It also sought to impose a corporate minimum tax rate, which if enacted could dampen corporate demand for tax-exempt bonds.
For the latest perspective on what’s moving the muni market, including Tom’s perspective on how infrastructure spending could impact munis, be sure to visit Baird Public Finance’s News & Insights page.