How Munis Reacted to US Elections and a Vaccine

Greg Recine and Juan Sampieri

Two major events with a one-week span appeared to give the municipal-bond market some clarity for 2021: the U.S. election and news of an effective COVID-19 vaccine. Following Election Day, the 10-year yield spread of AAA general-obligation municipal bonds over Treasurys decreased 35 basis points, crossing zero by mid-November and staying negative in recent weeks. Spreads are now at their tightest levels since the onset of the pandemic.

Looking forward, investors may wish to weigh the potential strength of a post-vaccine economic recovery with possible fiscal relief for states and municipalities from Washington. As an example of how the market recently reacted to political events, spreads last widened on Aug. 13. This coincided with the Senate’s recessing for the summer with no stimulus agreement, suggesting that there would be no additional economic-aid package passed before the elections.