By Gayl Mileszko
Market Commentary
Making Change
Not all the vote totals are in, but we have enough data to see that America has elected political change. Two years after we came out in droves to vote for it, we once again turned out in large numbers to make clear our demand for another kind. Many are calling the “blunami” a referendum on the President and his policies, others just see a clear rejection of the toxic mix of war, tariffs, and inflation, peppered with some anger directed at incumbents who fumbled the mandates they were given in 2024. Dozens of other issues, some local, some national, some supranational, provided motivation for citizens to oust, re-elect, or vote in a new Senator, Congressman, or Governor. Ballot questions on data centers, millionaire and billionaire taxes, bond issues, and property taxes, all contributed to the unusually high midterm turnout.
Sea Change
We know that all politics is undeniably local, but the national landscape has unquestionably changed as a result of the amalgamation of all Tuesday’s local votes. Due to the significant divisions within each party, as well as between the Congress and White House, gridlock is likely to continue. And that makes Wall Street quite happy. Well, mostly happy. We saw a huge post-election rally on Wednesday, a relief rally due to the removal of uncertainty. That created momentum in both stock and bond markets. For equities, it was short lived, as traders began to think through the increased likelihood of AI regulation, data center construction delays or halts, and defense spending cuts. Prices may remain volatile until investors see whether the Democrats can control their members and pass legislation, collaborate with the President or impeach him, go after those in his orbit for self-dealing, or focus on the issues that brought them into office. Housing, healthcare, and education interests know that, when the House, Senate and President can’t agree on anything, they can’t muck things up either.
No Small Change
Rating agencies and Treasury traders also know that the debt and deficit will not be reduced one penny as a result of Tuesday’s outcome. The Treasury has already eliminated the penny (the nickel is next) and for the longest time operated as if a billion was the biggest number in the world. Now the only denomination that matters are trillions: more than a trillion in interest payments on $40 trillion of debt subject to a limit about to expire by the middle of next year. Add to that perhaps another $3 trillion to $5 trillion a year if newly elected members have their way and somehow manage to enact Medicare-for-All.
Two Months to Waddle
The lame ducks have two months to waddle through confirmations and pass regular full-year appropriations bills or enact another temporary extension before the December 11 deadline to prevent a government shutdown. There are several other extensions or authorizations needed for agriculture and food assistance, flood insurance, disaster relief, surface transportation, community health, and defense. The problem is that, while some matters are urgent, there is little motivation to do anything. Florida Governor Ron DeSantis urges Senate Republicans to “roll in cots” to the Senate cloakroom so they can work around the clock and, united, do as much as they can before they pass the gavel. But there are plenty of sore losers, members that already announced retirements and just want to retire already, some entirely disinclined to toe what is left of the party line, and others that have been elected to other offices and want to ready their teams and task lists. Those in the minority about to become the majority are measuring drapes and will tend to stall or only approve the most necessary short-term extensions to carry into the 120th Congress when bills can be reworked.
Brother, Can You Spare a Bitcoin?
Unlike in 2024, polls and prediction markets turned out to be more right than wrong. These early warnings pointed to a disconnect between the healthy economic data being touted broadly by the Administration and Wall Street (low unemployment, solid wage growth, highest median household income on record) versus the reality being experienced by the majority of voters (gas, housing, and food prices too high, fear that AI will produce major job losses, escalating war and interest costs squeezing out social spending programs). The K-shaped economy was front and center during this mid-term election and is bound to be a focus of attention for the new Congress being sworn in just two months away on January 3. Crypto and digital-asset legislation will likely remain an important issue, particularly due to the recent $6.3 billion Binance crypto heist, although it is not quite on par with housing, health care, taxes, the war, and appropriations.
Shellackings and Drubbings
In the 1994 midterm elections during the first Clinton administration, 8 Senate seats, 54 House seats, and 10 governorships were lost to Republicans. During the 2010 midterms held in the first Obama administration, 6 Senate seats, 63 House seats and 6 governorships were lost. With several races yet to be called this year, Republicans have so far lost 7 Senate seats, 39 House seats and 5 governorships. And, for the first time, there will be 7 new members associated with the Democratic Socialists of America, linked to an agenda to abolish ICE, restore the enhanced ACA premium subsidies, reverse the estimated $1 trillion in Medicaid cuts, and pursue Medicare for All. There are even more dramatic policy goals: defunding police, adopting a new constitution, and abolishing the Electoral College, Senate, presidency, and Supreme Court. Of course, for the next two years, enacting almost any legislation will require the approval of President Trump, who has veto power as well as the bully pulpit. He will likely continue to command national media attention and the overall policy agenda, but there may be less of a blitzkrieg and more collaboration. The Democratic majority will set the congressional agenda and control the legislative calendar, and these seven new DSA members will likely receive outsized coverage while the 2028 campaigns launch.
What does a Democratic Congress Mean for Bonds, and Municipal Bonds in particular?
There are no immediate threats to tax-exemption or private activity bonds, and industry lobbying groups report that we have not lost any of our muni champions in Congress. Advocates like the Government Finance Officers Association, Bond Market Association and Securities Industry and Financial Markets Association will continue to press for the restoration of advance refundings but identifying offsets will remain a challenge. Some are looking for a permanent direct-pay bond program and the expansion of private activity bonds. Tax policy changes in state houses and legislatures, infrastructure projects on the drawing board, and the $67 billion of state and local ballot measures approved for bond issues will likely have a more immediate and lasting impact on the market. “Tax-the-rich” initiatives such as the millionaire income surtax approved by Massachusetts voters of course make tax-exempt bonds more valuable there. With respect to the data center controversies that drew many to the polls and produced more than 40 moratoria, we note that municipal bonds are increasingly being proposed in connection with financing the public infrastructure needed to serve them: electrical generation and transmission, water and wastewater systems, and roads. Some of these plans may be delayed, halted, accelerated, or altered as a result of Tuesday’s votes.
Winds of Change
On the federal side, more attention may be given by Democrats in Congress to affordable housing for seniors and young families, healthcare, and other workforce training. In the education sector, there may be greater emphasis placed on traditional public schools and higher education funding. In health care, we will likely see efforts to restore Medicaid cuts and ACA subsidies and provide for more home-based care. There may be renewed efforts to increase the federal minimum wage, require project labor agreements, expand legal immigration, and admit Washington D.C. and Puerto Rico as states. There are no vacancies on the rate-setting Federal Reserve Board until January 31, 2028, but the Senate would have to confirm any presidential nominees in the event of a resignation, and that could be tough going.
A November to Remember?
The calendar pages have turned to November, the election is (mostly) behind us, and we find that only four 5-day trading weeks remain in 2026. The holidays are right around the corner, starting with Veterans Day next week, when the bond markets are closed. Bond traders were actually quite sad to see October come to an end. After the disastrous September, it was a big recovery month. Treasuries closed 2.42% higher, investment grade corporates added 2.03% and high yield corporates returned 0.29%. Bloomberg described it as the “best October ever” for munis. Investment grade muni indices posted 3.61% returns; high yield munis were up 3.15% and taxable munis gained 3.31%. Muni tenors in the 12–22-year range gained 4.37%, and the multi-family housing index returned 4.19%. Muni ETFs added a staggering $21.1 billion of assets and borrowers brought $53 billion of issues. We have seen a rally since Election Day but do not attribute it to the mid-terms directly. As usual, broader interest rate trends, fund flows, inflation expectations (now closely linked with oil prices) and the supply-demand ratio tend to be the main drivers. Muni investors are, however, always happy to see prices rise and enjoy it whenever the market moves from risk to haven trades. The 2-year AAA general obligation benchmark yield closed Wednesday at 2.65%. The 10-year yield at 3.31% fell 5 basis points post-election and 8 basis points from October’s month-end. The 30-year yield at 4.76% also saw gains.
Time Change
Tax loss harvesting is still underway, contributing to some of the highest bids-wanted par and offerings on record. Reinvestment demand this month at $40 billion is expected to be on par with September and October, a big drop from this summer when principal and interest averaged close to $60 billion a month. On Monday, $20 billion hit accounts and investors went shopping. Detroit Community Schools sold $11.6 million of charter school revenue and refunding bonds, pricing the 30-year non-rated terms at 7.25% to yield 7.952%. The Public Finance Authority brought a $22.9 million BB+ rated financing for the Sky Pointe campus expansion at Somerset Academy of Las Vegas, structured with a 10-year maturity that priced at par to yield 5.00%. Presbyterian Retirement Communities had a $189.9 million A-minus rated offering that came through the Florida Local Government Finance Commission; the 2062 maturity was priced at 5.50% to yield 5.69%. And the City of Sartell, Minnesota sold $13.7 million of non-rated refunding bonds for County Manor that included 2044 term bonds priced at par to yield 5.75%.
Change Management
Amid the cheers and tears that always accompany an election day, and the volatility associated with geopolitical uncertainty, new technology buildouts, and rate hike expectations, we at HJ Sims remain laser focused on the financing needs of our nonprofit and for-profit banking clients and attractive income opportunities for our investors. We have watched Congress change 46 times since the 74th Congress was sworn in back in 1935, and we look forward to working with you to help manage and meet your needs through the 47th change and this 120th Congress. Reach out to your HJ Sims representative today to discuss your plans for the time that remains in 2026, and your goals, concerns, and interests for 2027.