How Recent Events Color Muni Bond Investing Strategy

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<h3>James A. Klotz</h3>

James A. Klotz

How can you spot a fixed-income investor with cash on the sidelines waiting for the ideal time to jump into the market?

He’s the one sporting a grimace.

Timing the market has never been a profitable long-term endeavor, and for municipal bond investors waiting for yields to spike, recent news doesn’t offer any relief: Long-term municipal bond issuance is expected to dip this year while investors are pouring money into all manner of securities. Furthermore, the outlook for those hedging their bets while anticipating quick changes to the tax code looks cloudy.

Prognostication, to be sure, is a perilous investment strategy.How Recent Events Color Muni Bond Investing Strategy

Long-term muni bond issuance to dip

While total muni issuance is expected to rise slightly this year, issuance of long-term municipal bonds, which provide the most attractive yields for investors, is likely to slip, according to a recent survey.

In 2016, $423.8 billion in long-term munis were issued. This year, issuance should fall to $417.5 billion, a survey by the Securities Industry and Financial Markets Association found.

Meantime, investors are flocking to mutual funds and exchange-traded funds at a clip not seen for more than three years. A wide variety of investments saw an influx to the tune of $24.3 billion for the week ending Feb. 1, Reuters reported.

Muni bond exemption and the tax code

As if soothsayers weren’t already challenged, there’s also the specter of changes to the tax code. Over the years, a number of proposals have sought to discontinue or curtail the tax exemption of munis, much to the dismay of a raft of state and local officials. President Trump, though, recently indicated his support for the exemption (Trump Surprises Mayors, Supports Muni Tax Exemption).

How any of this plays out is anyone’s guess. As the administration grapples with a host of other matters, including the Affordable Care Act, a significant tax overhaul isn’t expected before 2018.

What we do know, however, is this: an investment strategy of forgoing tax-free income while leaving cash on the sidelines in money-losing money-market funds has never been more punishing.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Feb 15, 2017

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.