Muni bonds' U.S. tax breaks will remain
NEW YORK (Reuters) - The $3.7 trillion U.S. municipal bond market took a big hit in December when investors feared a fiscal deal between Republicans and Democrats could include the elimination of the tax-exempt status of bonds that finance roads, hospitals and schools across the country.
The tax hikes for the wealthy that Congress approved on January 1 spared those bonds, making them even more appealing to well-heeled investors seeking to minimize their tax hit.
But the ongoing debate in Washington about the federal debt ceiling poses a continued concern to states, counties and cities that fund their infrastructure spending with tax-free debt. A potential overhaul of the tax code could eventually shake up the status-quo.
"One seemingly ever-present element in the negotiations is the proposal to eliminate the tax-exempt status of municipal bonds," said Philip Fischer, an expert on municipal finance with consultancy eBooleant. His book, "Investing in Municipal Bonds -How to Balance Risk and Reward for Success in Today's Bond Market" was published in January by McGraw-Hill.
Fischer, who has more than 25 years experience in the muni market, says he expects the tax-exemption to stay in place.
The following are Fischer's comments from a recent telephone interview with Reuters:
Q: Do you still see the risk of the tax-exempt status of municipal bonds being eliminated?
A: "The better view is that they would leave the tax-exemption alone ... The taxation of municipal bonds is not going to yield the U.S. Treasury a great deal of money but it could create a tremendous amount of chaos with the municipal bond market. I was on a trading floor in 1985 when there was a proposal to retroactively tax all municipal bonds and the market simply stopped until it was clarified.
"The municipal bond market performs an essential function in this country: the states' and local governments' sovereign bonds provide the bulk of the infrastructure financing in the United States."
Q: How much do you think muni bond yields might rise as a result of a change in taxation?
A: "There is no way to absolutely know that number. Most people think it would be by between 50 and 100 basis points. Also, if the Federal government may tax municipal bonds ... I do not see any reason why states would not tax (income from) Treasuries. No one wants to see that. States would be very reluctant to do so.
"The U.S. government is the largest debtor in the world and you would expect that the largest debtor in the world would treat carefully their bond buyers."
Q: How much does the tax-exempt status cost the U.S. Treasury?
A: "I believe the Treasury thinks it costs $140 billion a year, but I would say one can debate how the number is calculated."
Q: Analysts' estimates for issuance in 2013 range between a low of $325 billion and a high of $400 billion. What's your estimate?
A: "The higher end at $400 billion. There is still a lot of refunding to be done and states and local governments have pent-up demand for infrastructure projects. The impact of the Great Recession will pass and as it passes people would see states and local governments want to fund more infrastructure."
Q: 2013 could be the year when U.S. interest rates will rise. How this will impact the municipal bond market?
A: "Some increases in municipal bond rates should be expected but it should be in the order of few basis points. I do not have a forecast but I would expect something in the order of between 10 to 20 basis points. And yields will fluctuate. Muni bonds tend to lag Treasuries but muni and Treasuries are not well arbitraged and we will keep seeing anomalies."
(Reporting by Tiziana Barghini; Editing by Dan Grebler)
- Tweet this
- Share this
- Digg this
- Still no sign of Malaysian jet lost in 'unprecedented mystery' |
- Missing Malaysian jet may have disintegrated in mid-air - source |
- Exclusive: Malaysia plane probe narrows on mid-air disintegration - source
- CORRECTED-UPDATE 4-Malaysia Airlines plane crashes in South China Sea with 239 people aboard - report
- TIMELINE-Malaysia Airlines flight to Beijing missing in Asia