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Video: What muni investors should watch in 2019

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      By Craig R. Brandon, CFA, Co-Director of Municipal Investments, Eaton Vance Management

      Boston - As a municipal-bond portfolio manager, one of the things I'll be watching most closely in 2019 is if the jitters in the corporate-credit market start to spread.

      Munis have performed pretty well during the current credit cycle. However, they could get more attractive if the market continues to worry about credit quality in the corporate-bond market, because like Treasurys, munis tend to benefit from any flight to quality.

      Another thing muni investors should obviously pay close attention to is the Federal Reserve, and specifically how many rate hikes we may get in 2019. The Fed raised rates in December as expected, but the question is how many more hikes we get in 2019, if any.

      (Tap or click the image below to view the video.)

      Blog Image Brandon Outlook Jan 3

      The Fed's latest dot plot is forecasting two hikes in 2019, but the bond market seems closer to anticipating one or even none. Personally, I think the Fed will take a more dovish, wait-and-see attitude in 2019.

      That's one reason why I see 2019 as a year of transition for the bond market. We've had a pretty steady diet of Fed rate hikes since 2015, and they have all been very well-telegraphed. That may change in 2019.

      Turning to politics, which always have an impact on the muni market, there were a lot of interesting developments from the midterm elections. At the federal level, I believe Democrats taking control of the House of Representatives should overall help stabilize the muni market.

      First, further tax cuts are likely off the table. That matters because whenever there are tax cuts, munis are always looked at as a potential source of funding for the cuts. Also, with Democrats in charge of the House, I think that means the tax exemption for muni income won't be altered. That's an idea that's come up periodically over the years.

      At the state level, I think J.B. Pritzker winning the governor race in Illinois is significant. The state has suffered some ratings downgrades in recent years, mostly due to the inability of Republican Governor Bruce Rauner and the Democratic legislature to come to terms to address the state's fiscal problems. Whether you agree with Democrats or Republicans philosophy, having a Democrat as governor in Illinois may lead to at least some deals being made with the legislature, versus the inaction of recent years.

      Bottom line: Putting it all together, the credit situation the muni market is strong overall. And hopefully some positive developments in problem areas such as Illinois, and potentially the end of the Puerto Rico bankruptcy, could help improve the credit picture further.