Thread: Muni watch
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Old 01-06-2018, 05:08 PM
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Mary Pat Campbell
Join Date: Nov 2003
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Corporate Tax Break Already Affecting Muni Market

Even though the federal tax overhaul has yet to go into effect, the cuts to the corporate tax rates are already impacting the municipal market. Preliminary data shows that banks have begun to reduce their muni bond buying. According to Municipal Market Analytics (MMA), banks' third quarter net buying fell to about $5.7 billion. That’s the lowest quarterly number since 2009, when banks collectively sold off a net $10.3 billion.

In addition to reducing how much they buy, MMA’s Matt Fabian says it’s “not unreasonable that at least some institutions will become net sellers” of tax-exempt municipal bonds in the early months of 2018. This, he says, could counteract what was expected to be an advantageous interest rate climate for governments.

The Takeaway: So why are banks reducing their municipal bond holdings? With the GOP tax bill, the corporate income tax rate was slashed from 35 percent to 21 percent. That means that banks and other corporations will start earning more money off other types of investments because their tax rate is a lot lower. It could even mean that, after taxes, those other investments are more lucrative than the low interest rate muni bonds.

On the other hand, the muni market might see a counter development to this drop in demand. That's because the GOP tax bill also eliminated other types of tax-free municipal bonds, causing a mad rush to issue them before the end of the year. According to Bloomberg News, states and localities sold a record $55.6 billion of debt through Dec. 22, which could help to keep interest rates steady for governments.


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