During the fourth quarter of 2016, 30-year Treasury interest rates and 30-year Municipal Market Data (MMD) rates rose. The bond market’s sharp reaction to the election of Donald Trump assumes that many of the candidates’ campaign positions will be enacted, leading to a boost in the economy, rising inflation, and large deficits. President-elect Trump has proposed a $1 trillion infrastructure plan using $137 billion of tax credits, repatriation of earnings held overseas at 10%, and lower corporate and individual income tax rates. With cutting taxes and increasing spending, deficits would rise sharply, however we do not believe that deficits will be disregarded when legislative plans are negotiated. Tax cuts or spending may have to be constrained if deficits are to remain manageable. It is too early to tell if President-elect Trump’s proposals would have a particular impact on municipal bonds. Lower income tax rates would reduce the value of the municipal tax exemption, but if municipals retain their tax-exemption and other deductions are curtailed, the impact could be small. There is little historic correlation between tax rates and municipal yields and we believe there would still be good value to the exemption and potentially fewer alternatives. Some of the money for the proposed infrastructure spending would likely be raised in the municipal market, but with the proposal for the use of tax-credits and for-profit financing of infrastructure, it is unclear how much supply would be increased. During the quarter, the Saratoga Municipal Bond Portfolio maintained its structure awaiting an opportunity to extend durations as the new administration’s plans become clearer.
Information contained herein was obtained from recognized statistical services and other sources believed to be reliable and we therefore cannot make any representation as to its completeness or accuracy. Any statements not of a factual nature constitute opinions which are subject to change without notice.
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