Elizabeth Warren wants to tax those she calls ultra-millionaires. Bernie Sanders has targeted the top 0.1%. And Joe Biden is seeking to reverse President Donald Trump’s tax cuts.

On the whole, Wall Street may not be very excited about the tax-the-rich push that’s front and center in the Democrats’ efforts to unseat Trump next year. But a $3.8 trillion corner of the bond market could reap big gains if one of them wins the White House.

That’s because the value of tax-exempt state and local government debt tends to rise when taxes head higher as wealthy investors buy those bonds to hold down what they owe.

The securities delivered outsize returns after President Bill Clinton took office and went on to raise the top marginal tax rate. It happened again in 2009, before President Barack Obama allowed tax cuts for the highest earners to expire. Even Trump helped: to pay for his reductions, he capped state and local tax deductions, setting off a municipal-bond buying spree by wealthy Americas looking for ways to shelter their income.

“If it looks like Democrats could take control, you’re pouring gasoline on the fire at that point,” said Matt Dalton, chief executive officer of Belle Haven Investments, which oversees more than $10 billion in municipal debt.

About 42% of the $60 billion of tax-exempt interest paid in 2017 went to Americans who make more than $500,000 a year, with another $22 billion paid to those earning between $100,000 and $500,000, according to Internal Revenue Service statistics. And demand from such buyers tends to pick up when there’s a risk that taxes will be raised.

It’s unclear yet how the wealth taxes proposed by Warren and Sanders would affect demand for municipal bonds, since much of that would depend on the details worked out in Congress, and scraping Trump’s limit on local deductions could also weaken demand.

But municipal bonds tend to benefit early in Democratic presidencies. Tax-exempt securities became more expensive -- relative to U.S. Treasuries -- after Clinton and Obama were first elected, Barclays Plc found in a 2016 report. The opposite happened with President George W. Bush, while Trump’s surprise victory in November 2016 sent the municipal market to its biggest monthly loss since 2008 amid speculation that tax rates would be cut.

Stephanie Larosiliere, senior client portfolio manager at Invesco Ltd., anticipates heightened demand for municipal bonds if a Democrat defeats Trump, given the need for higher taxes to finance their health-care and education plans.

“We would expect those affected to seek some refuge, with municipals likely being an option for earning tax-exempt income to offset the increased tax outlay,” she said in an email.

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