Cap And Pain: Tax Law Prompts Move To Munis

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

When the president and Congress squeezed, taxpayers felt it – and moved to munis to ease their pain.

Stung by the tax overhaul, investors are pouring funds into municipal bonds at an extraordinary pace.

So far this year, inflows into muni funds have reached at least $1 billion per week.

For the week ending Feb. 6, the amount hit $3.3 billion, the largest weekly inflow since at least 2007, according to Bloomberg.

A key motivation in the move to munis, analysts say, is the tax law passed in late 2017, which capped state and local tax deductions at $10,000, prompting investors, especially those in high-tax states such as New York, California, Connecticut, New Jersey and Massachusetts, to flood into munis.

Tax Law Prompts Move to Munis

And why not?

Returns are attractive: Tax-equivalent yields for affluent investors can exceed 7.00% on high-quality municipal bonds.

Further, analysts say, state and city finances are generally strong.

The primary draw, of course, has always been the dependable stream of tax-free income – especially during turbulence in the equity markets – that enable investors to sleep well at night.

Easy Move To Munis

As we have counseled clients over many years, the only requirement for successful municipal bond investing is common sense.

As with any security, it’s imperative to understand the underlying credit worthiness: How will you be paid?

Think quality, then yield. The best value and income are found in longer-term bonds.

Finally, ignore conjecture: Where is inflation headed? Will interest rates rise, fall or remain the same? What will the Fed do next?

The assumption behind these questions is that it’s possible to time the market, which of course is folly.

But some investors are captivated by information that is often conflicting and misleading, and become paralyzed. They keep their money on the sidelines, sacrificing tax-free income they’ll never recoup.

Successful, longtime investors on the other hand know that bond investing is different than stock picking. They’re in it for the long haul. They expected this most recent stampede and won’t be surprised by the next one.

True to form, they’ll remain consistent and keep their interest clock ticking.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Feb 27, 2019

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.