Midterm elections could reshape the US municipal bond market

On Tuesday, American voters go to the polls in midterm elections, and the outcome could go beyond politics. According to CNBC Markets, the vote could affect the municipal bond market, known as munis, in three ways: state fiscal measures, the offer of new bonds and the composition of Congress.

The main attraction of these roles is tax. According to CNBC Markets, interest on munis is exempt from federal tax and, if the investor lives in the state that issued the bond, also from state tax. Therefore, any change in the tax burden changes the value of this exemption for the investor.

California has some of the broadest proposals. There is an initiative known as the 'billionaire tax', which would create a single tax of 5% on the wealth of taxpayers with at least US$1 billion in assets. Another measure seeks to make permanent the temporary increase in taxes on income above US$371,000, an amount adjusted for inflation, which currently expires in 2031.

In Florida, voters will decide whether to extend the homestead exemption to non-school district property taxes. The extra US$25,000 exemption, which does not apply to school taxes, would rise to US$150,000 in 2027 and to US$250,000 in 2028, and new residents would need to wait five years. According to Tom Kozlik, from HilltopSecurities, if the measure is approved, local governments will have to find another source of revenue or raise rates, which does not necessarily mean credit downgrades. For those who defend fiscal responsibility, the central question is precisely this: how will this revenue be replaced.

Dan Close, head of munis at Nuveen, describes a pattern in both camps. According to him, Democratic states pursue progressive income taxes, while Republican states cut property taxes. In Close's reading, tax increases would make the exemption more valuable and attract investors to munis, which would drive up bond prices. A cut in property tax could deteriorate the credit of some municipalities, and the assessment, according to him, is case by case.

On the supply side, SIFMA, cited by CNBC Markets, recorded issuances of US$473.8 billion until September, an increase of 7.8% compared to the same period in 2025. In the entire 2025, the total volume reached US$587.3 billion, 14.3% above 2024.

What changes for the investor

For those who invest in munis, the picture is one of uncertainty about taxes, with no defined outcome. If states raise income taxes, the exemption gains weight, and, according to Close, this could attract buyers and support prices. If property tax cuts are made, the focus will be on the credit quality of each municipality, assessed on a case-by-case basis. In both scenarios, the reading changes issue by issue, and not uniformly for the market. This article is not a recommendation to buy or sell and does not project prices.

Automatically translated from Portuguese.