Municipals and the Fiscal Cliff

Of all the possible outcomes from the Fiscal Cliff negotiations, municipal bonds are almost certainly going to be impacted. There is the possibility that tax rates will go up, which should be supportive of muni valuations. There is also the possibility that the tax benefit of owning municipals is capped at 28% or some other number. That would harm muni valuations even if tax rates do go up. Some proposals have suggested creating limits on what kind of issuers can sell tax-exempt bonds. And we can't completely ignore the possibility that a Simpson-Bowles like tax reform is reached that would eliminate the municipal tax-exemption entirely. How do you invest in municipal bonds given all this uncertainty?

First, let's agree that while it is possible that we will get some major tax reform, it won't come before year-end. That will take much more time for negotiation. Second, I think we have to call that possibility remote. And finally, even under Simpson-Bowles, existing bonds would be grandfathered. Thus the value of current bonds would skyrocket. Given all this, I don't think the major tax reform scenario is worth thinking too much about....394 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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