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The Triple Threat to your Muni Bonds

December 16, 2016 By Jeremy Jones, CFA

Here the Financial Times outlines the triple threat that a Trump administration poses to municipal bonds. Muni bonds aren’t an area of focus for us at Young Research. In addition to the potential risks to munis outlined below, we have tended to eschew the asset class(except during periods of extreme opportunity) because much of the market is long-maturity, liquidity is spotty on many issues, timely financial disclosure is lacking, and as pointed out below, there is the ever lurking tail risk that a major tax reform bill could eliminate the tax-advantaged nature of muni bonds.

The US president-elect poses a triple threat to the country’s municipal bond market. This has been the conclusion of investors in the wake of Donald Trump’s election — and why the $3.8tn market for state and local government debt has suffered some of the sharpest selling seen in fixed income markets. A recovery over the past few days was then cut short by a warning from Janet Yellen, the Federal Reserve chair, that monetary tightening may be more aggressive than expected next year.

Here is the trio of concerns.

First (and not unique to municipal bonds), a Trumpian stimulus from tax cuts and infrastructure spending would raise interest rates and hit the bond market generally.

Second, muni bonds are exempt from tax but that benefit becomes less significant if personal taxes are cut.

Third, tax reform plans occasionally propose the repeal of munis’ tax exempt status as a way of paying for tax cuts elsewhere.

 

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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