Looking Beyond the Headlines in Muni Market

While the barrage of policy changes early in the second Trump administration has weighed on business and consumer sentiment and injected volatility into markets, at this point we don’t see it adding a lot of incremental risk to tax-exempt municipal bond investment. If anything, the technical challenges that faced the muni bond market in the second quarter have made municipal bonds yields more attractive, especially at the longer end of the curve where much high yield issuance resides. Moreover, the recent budget reconciliation bill maintained the tax-exempt status quo for municipal bonds, removing one potential overhang. 

For active, fundamental investors, the shifting political winds may create interesting opportunities to go against the grain. Take higher education, which has come under attack from the Trump administration. With the White House’s ire focused on some of the highest-profile universities in the country, nearly 6,000 other post-secondary institutions are going about their business free from that sort of elevated political risk; strong operators in the higher-education space with compelling yields may make for attractive investment opportunities.¹ 

Hospitals are in a similar boat. The cuts to Medicaid will certainly have an impact, but $1 trillion isn’t leaving the system today; many of the reconciliation bill’s provisions phase in over several years, giving hospital operators time to adjust their business models to maintain stability and negotiate with commercial payors for higher reimbursement rates. As others tar the entire hospital sector with the same brush, opportunities may emerge in select issuers.