Muni Bond Market Could Suffer from Tax Exemption Limits

Tuesday, 13 Nov 2012 11:10 AM

By Dan Weil

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Pimco’s star bond fund manager Bill Gross is making waves with his heavy municipal bond weighting.

But other experts say tax changes might make munis much less attractive to upper-income investors, depressing demand in the market.

The Obama administration has proposed a ceiling of 28 percent for tax exemptions on muni interest payments. So someone in the 35 percent tax bracket would have to pay a 7 percent tax on their muni interest income.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

“This election makes the administration's proposal for a 28 percent cap much more plausible,” Matt Posner, legislative coordinator at Municipal Market Advisors, said at a recent investment conference, Investment News reports.

“In the Senate, even before this election, there was bipartisan talk already that this 28 percent idea had legs.”

Such a move “could lead to sustained redemptions,” Peter Coffin, president of Breckinridge Capital Advisors, told the publication. “If you start limiting the exemption, you're only going to make the market less efficient and more vulnerable.”

But Ebby Gerry, a muni manager at UBS Global Asset Management, tells Bloomberg that ordinary income tax rates are more likely to rise than the exemption is to be capped.

In that case, munis would be more attractive to upper-income investors. “Muni bonds would be a valuable type of asset going forward,” Bill Gross, Pimco’s chief investment officer, told Bloomberg.

Gross also increased his exposure to Treasurys last month.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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