Midterm Elections Poised to Reshape Municipal Bond Landscape: Key Investment Considerations

The outcome of Tuesday’s election carries significant implications across markets, including municipal bonds.

Congressional contests are dominating headlines, but for municipal investors, state‑level outcomes may pose even greater short‑term risks to the sector.

Ballot measures across the nation could either offer tax credits or impose higher taxes on high earners, depending on geography.

“There is a clear split between red and blue jurisdictions,” said Dan Close, head of municipals at Nuveen. “Revenue‑seeking blue states are adopting graduated income tax schemes to capture more from high earners, while red states aim to boost affordability by lowering property taxes.”

Red‑aligned states typically lean Republican, whereas blue‑aligned states tend toward Democratic leadership.

California has introduced the “billionaire tax,” a one‑time levy set at 5 % of wealth for taxpayers with assets exceeding $1 billion. Additionally, a ballot measure would make a temporary tax surcharge on incomes above $371,000 permanent, with annual cost‑of‑living adjustments, and is scheduled to lapse in 2031.

“Such tax increases would significantly enhance the value of tax exemptions,” Close explained. Consequently, investors are likely to shift funds into municipal bonds, which historically respond positively to tax hikes, driving prices upward.

“Municipal credit can be highly case‑specific; potential tax rollback might trigger downgrades in some issuers,” Close remarked.

Red vs. blue taxes

Ballot measures across the nation could either offer tax credits or impose higher taxes on high earners, depending on geography.

If passed, some local governments will need alternative revenue streams or higher tax rates to offset lost receipts, said Tom Kozlik, head of public policy and municipal strategy at HilltopSecurities.

“A downgrade isn’t inevitable, but careful revenue balancing will be essential to maintain creditworthiness,” Kozlik added.

Not all municipalities will be hurt equally, so municipality‑by‑municipity analysis is essential for investors.

“Munis are a core component of the portfolio that investors prioritize, providing stability,” Kozlik asserted.

Increased supply

Tuesday’s electorate will also vote on additional state and local government debt issuances. This could pressure a market that has already experienced elevated supply.

Year‑to‑date issuance through September totals $473.8 billion, reflecting a 7.8 % rise over the same period last year. Full‑year 2025 output reached $587.3 billion, a 14.3 % increase year‑over‑year, per Sifma.

Cooper Howard, director of fixed income research at the Schwab Center for Financial Research, identifies elevated issuance as the most pressing challenge following the election.

“The sheer volume of issuance has been a key driver requiring robust demand to sustain total returns,” Howard stated.

Howard added that new issuance will materialize gradually over the next couple of years, providing a temporary reprieve.

The composition of the incoming Congress could shape policy priorities that affect munis, Kozlik warned.

“Tax‑related and affordability measures may surface in early 2025, influencing housing markets, higher‑education costs, and public power financing,” Kozlik observed.

Opportunities now

Close at Noveen advises investors to scrutinize states with ballot‑level tax increases.

“Should certain tax proposals be enacted, bond prices tend to rise, creating opportunities to acquire blue‑state munis ahead of the November vote,” Close added.

Howard sees munis as a compelling asset class today, especially for investors in the 24 % tax bracket, citing solid fundamentals and high credit quality—roughly 70 % of the broad muni index is triple‑A or AA rated.

Kozlik is also bullish, labeling yields as “really attractive” and advising investors to focus on AA‑rated or higher‑rated bonds.

“Munis are a core component of the portfolio that investors prioritize, providing stability,” Kozlik asserted.

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