Tags: municipal | bonds | fiscal | cliff

Investors Flock to Muni Bonds on Fears of Tax Hikes

Thursday, 15 Nov 2012 12:35 PM

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Investors have flocked to tax-exempt municipal bonds on fears that President Barack Obama’s reelection will herald in 2013 with tax hikes on investment income, experts say.

At the end of this year, a series of tax cuts are scheduled to expire at the same time cuts to government spending kick in, a one-two punch known as a fiscal cliff that could send the country falling into a recession next year if left unchecked by Congress.

Democrats favor allowing the tax breaks to expire on wealthier Americans, while separately, the president’s Affordable Care Act will raises taxes on investment income.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Both Republicans and Democrats are set to roll up their sleeves and try to agree on a way to steer the economy away from the fiscal cliff, but many investors are betting that taxes are going to rise on investment income anyway, especially with Obama’s re-election, which has made municipal debt a nice safe haven even if supplies are tight.

“The argument that’s been made for at least the last six months, is that on relative value basis, it’s better to buy a muni than a Treasury because it’s tax-advantaged,” said Peter Bianchini, managing director and senior municipal bond strategist at Mesirow Financial, according to CNBC.

“If you were to buy a triple-A-rated state versus the U.S. government, they’re both fairly safe credits. With the end of the election last week, there was this new sentiment — tax rates are going up.”

From Nov. 7 to 12, $500 million in new money flowed into municipal bond funds, CNBC added, citing Lipper U.S. Fund Flows data.

Just a week prior, another $866 million found its way into municipal bond funds.

“If you look at the flows into municipal bond funds, they’ve been very high. That’s driving this,” Bianchini added.

“From a trading standpoint, it’s hard to find bonds. New deals go away right away.”

Some experts, however, don’t see a bubble swelling yet.

“The reason that I believe it’s not a bubble is because a bubble is something that’s unsustainable and bursts,” John Donovan, head of municipal bond trading at Cantor Fitzgerald, told CNBC.

“This is because there’s an imbalance in supply and demand, and that imbalance is being caused by large inflows into mutual funds and concerns about the tax exemption being more valuable post-election.”

In this case, issuers can meet demand by selling more debt to meeting ongoing needs.

Other experts, meanwhile, are urging investors not to rush out and change investment strategies over fears surrounding the fiscal cliff.

No one knows what is going to happen with taxes as of now.

“You shouldn’t be making long-term decisions based on what’s happening in the short term,” said Dan Keady, director of financial planning at TIAA-CREF, according to U.S. News & World Report.

“We can get overwhelmed by what’s going on.”

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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