The first minutes of Wednesday's bond market trading reflected long-awaited certainty regarding the election outcome, an issue that has been hanging over investors for months. With an Obama victory in the books, investors appeared to be factoring in an environment of slower growth, higher taxes, and a continuation of the U.S. Federal Reserve's stimulative policy. With Republican candidate Mitt Romney's pledge to restrict the Fed's easy-money policies, Fed Chairman Ben Bernanke's pledge to keep rates low through 2015 was somewhat in doubt. According to a recent survey by Barclays, 32% of investors polled said that tighter Fed policy was their leading concern in a Romney presidency. The renewed clarity on this issue - and likelihood of easy-money policies remaining in place at least through the end of Bernanke's term in 2014 - buoyed the prices of U.S. Treasuries and mortgage-backed securities, both of which have been targeted for purchase by the Fed as part of its "quantitative easing" policy.
At the same time, the outlook for steady to higher tax rates for the wealthy provided supported the performance of municipal bonds. On the other side of the equation, the higher odds of a less business-friendly policy environment led to an initial decline in the prices of high yield bonds.
It's important to keep in mind that these are only the initial knee-jerk market reactions, which don't always tell an accurate story. For a better idea as to how market participants are handicapping the outlook for economic and tax policy, keep an eye on these asset classes in the weeks ahead.