Weekly Municipal Monitor: The Votes are in. What Comes Next for Munis?

Markets Last Week

Fixed income markets extended their rally last week as falling energy prices and renewed risk aversion supported Treasuries. Democrats' congressional victories raised expectations of greater fiscal restraint under divided government, while sharply lower oil prices eased near-term inflation concerns. The labor market remained resilient: October nonfarm payrolls rose 165,000, exceeding expectations and September's upwardly revised gain of 60,000, while the unemployment rate declined to 4.1% from 4.2%.

Treasuries rallied across maturities and the curve steepened, with yields falling 8 basis points (bps) in 2-years and 4 bps in 30-years. Municipals outperformed as high-grade tax-exempt yields moved 14 bps lower in 2-years and 11 bps lower in 30-years.

Supply and Demand Technicals

Weekly reporting municipal funds took in US$287 million of net inflows in the week ended November 4, decelerating from the prior week, according to Lipper. Short-term (US$279 million), intermediate (US$219 million) and short/intermediate (US$72 million) funds all saw inflows, more than offsetting US$283 million of outflows from long-term funds. The modest inflows bring year-to-date (YTD) net inflows to US$82.1 billion, with ETFs accounting for 88% of total flows.

Last week's new issue supply totaled US$9.6 billion, 4% below the prior week. This week's calendar is expected to decline to US$6.5 billion, with the Veterans Day holiday contributing to the lighter calendar. YTD issuance reached US$534 billion, 9% ahead of last year's record pace. The 30-day visible supply also fell 33% to US$9.3 billion.

This Week in Munis: 2026 Election Series—The Votes Are In. What Comes Next for Munis?

The election delivered a significant political shift in Washington, while state voters sent mixed messages on taxes and public spending. For municipal investors, however, the key question remains unchanged: How will these decisions affect governments' ability to generate revenue, manage expenditures and meet their financial obligations?

A Divided Washington: Implications for Federal Policy

Democrats won control of both the House and the Senate, ending Republican control of Congress and creating divided government for the final two years of US President Trump's term. From a municipal market perspective, divided government could stabilize federal tax policy by making sweeping legislative changes less likely.

Federal funding is an area to watch. Democratic control of Congress could limit further cuts to federal assistance for healthcare, education and infrastructure. However, divided government also raises the risk of budget standoffs and delayed appropriations. Democrats are unlikely to enact partisan legislation because they lack the votes to override a presidential veto. However, bipartisan legislation, particularly regarding the Federal Emergency Management Agency, highway authorization, healthcare and infrastructure, could survive a presidential veto. The federal income tax exemption for municipal bond interest, which survived the 2025 tax legislation, may benefit from this environment.

Colorado: A New Approach to Income Taxes

Colorado voters narrowly approved Amendment 87, replacing the state's flat income tax with a graduated structure that lowers taxes for most residents while raising rates to as high as 8.4% on higher-income taxpayers. Voters also rejected a competing proposal to cap income tax rates and supported greater flexibility to retain revenue under the state's Taxpayer's Bill of Rights.

These changes could provide additional resources for education, healthcare and other programs and improve budget flexibility. However, greater reliance on high-income taxpayers could increase exposure to economic cycles and financial market volatility.

California: Wealth Tax Faces Rejection

California voters have rejected Proposition 40, which proposed a one-time 5% tax on billionaires' wealth while approving Proposition 3, which makes permanent a temporary income tax on high earners. Meanwhile, Proposition 42, which would restrict new taxes on financial assets and certain retroactive taxes, also passed.

The results suggest resistance to Proposition 40's approach to taxing wealth. Whether proponents will try again remains to be seen. Rejecting the wealth tax eliminated a potential source of one-time funding, but it also reduced uncertainty about implementation, potential taxpayer relocation and the effect on recurring income tax collections.

Washington: New Income Tax Appears Likely to Survive

Washington voters have rejected Initiative 645, which would have repealed the state's recently enacted 9.9% tax on annual income exceeding US$1 million.

This new tax adds a revenue source and diversifies a system historically dependent on sales, business and property taxes. While diversification could benefit state finances, collections from high-income taxpayers may introduce additional volatility. Legal challenges and implementation remain key considerations.

Florida: Property Tax Relief Creates Local Challenges

Florida voters approved Amendment 3, significantly expanding the homestead exemption for certain non-school property taxes. The measure provides meaningful relief to homeowners but could create substantial fiscal pressure for local governments. State estimates suggest annual local revenue reductions could eventually approach US$12 billion. Although property taxes supporting school districts and debt service are generally protected, counties, municipalities and some special districts could face difficult operating decisions.

The credit implications will vary considerably. Governments with diverse revenue sources, high home values and strong reserves may be better positioned to absorb the reductions, while those heavily dependent on residential property taxes or with lower home values could face spending cuts, alternative revenue measures or reduced financial flexibility.

Governors: A New Direction for State Fiscal Policy?

The election also produced notable changes in state leadership. These changes could influence state approaches to education funding, healthcare, taxation and infrastructure investment. However, a change in governor does not necessarily change fiscal policy. Legislative control, existing budget commitments and economic conditions will ultimately determine how much flexibility new administrations have. Divided control of the legislature and governorship can also produce budget stalemates and gridlock.

For municipal investors, state aid to local governments will be particularly important. As states balance competing priorities, decisions about funding for schools, local governments and healthcare providers could influence individual credits.

Looking Beyond the Election Results

The election may be over, but its implications for municipal credit and valuations will unfold over several years. While voters in Colorado and Washington showed greater appetite for higher taxes, California's rejection of the billionaires’ tax underscored limits to voter support for additional taxation. Changes in tax policy can affect revenue stability, while new political leadership can shift spending priorities and capital investment. However, election outcomes alone rarely determine credit quality. Financial reserves, revenue diversity, expenditure flexibility and sound management remain critical to an issuer's ability to navigate policy changes.

From a valuation perspective, higher marginal tax rates in Colorado and Washington should strengthen the appeal of in-state municipal bonds. Considering the current yield-to-worst of the Bloomberg Colorado and Washington Municipal Bond indices, the higher state tax rates would increase taxable-equivalent yields by approximately 58 bps and 130 bps, respectively.

For municipal investors, the challenge and opportunity is to look beyond political headlines and understand how policy decisions affect individual issuers. In an increasingly complex fiscal environment, experienced credit analysis remains essential to identifying risks and opportunities and judging whether municipal bond valuations reflect them appropriately.

Key Market Themes

1) Municipal taxable-equivalent yields remain near their highest level in over a decade

2) Tax selling weighs on technicals, drives opportunity

3) High-grade munis offer attractive after-tax yield pickup vs. taxable alternatives