Tax Raise Speech Spurs Rich To Splurge On Muni Bonds


Wealthy Americans considering possible tax hikes are helping to invest record amounts in municipal bond funds.

In the first six months of 2021, U.S. municipal bond funds attracted about $ 56.9 billion in net new money, with the highest number for any first half dating back to 1992, according to data from Refinitiv Lipper.

Advisors to high-income investors say the potential for a tax hike has been at the center of discussions in recent months, drawing attention to munis.

Municipal bonds generally offer interest payments exempt from federal income taxes and sometimes state taxes in the state where the bond is issued. State and local governments, as well as institutions such as hospitals and universities, issue municipal bonds to raise funds for projects that include building schools and paving roads.

Many affluent households fear President Biden and the Democrat-controlled Congress will raise taxes. During the election campaign, Mr Biden proposed raising the top personal tax rate to 39.6% from 37%, among other changes to taxes for high-income households and businesses. Democrats have taken control of Congress – albeit narrowly – and have recently been working to decide which tax proposals they should try to push through. This change in the top individual rate is one of the proposals that garners the broadest support among Democrats and seems more likely to happen than the other proposals.

“Taxes are a major concern for clients right now,” said Anderson Lafontant, senior advisor at Los Angeles-based Miracle Mile Advisors. “It really increases the demand for municipal bonds because they have tax-free interest. “

Some investors may also have sought to rebalance their portfolios after a dramatic rise in the stock market that sent US equity positions skyrocketing. Households seeking to restore their risk exposure to where they were before the S&P 500 rose 16% in 2020 may have redirected some of those gains to fixed income, including municipal bonds. U.S. stocks continued to advance, pushing the S&P 500 up 15% in 2021.

Although the yield on munis has not been very high lately, it has been better than that of other well-rated bonds. A Bloomberg Barclays municipal bond index returned 1.8% to investors this year, including interest and price appreciation, on Thursday, compared to a loss of 0.4% on a Bloomberg Barclays bond index of American company of quality, according to FactSet.

“There is little you can do to invest in order to generate tax-free income. Munis are the most obvious, the most liquid and the safest.

– Alex Chaloff, Co-Head of Investment Strategies at Bernstein Private Wealth Management

“Muni’s returns will be limited in the short term, but tax efficiency is unbeatable, and that’s what’s most attractive today,” said Alex Chaloff, co-head of investment strategies at Bernstein Private Wealth Management. “There is little you can do to invest in order to generate tax-free income. Munis are the most obvious, the most liquid and the safest.

Among high-yield bonds, municipal also outperform: an ICE BofA municipal high-yield bond index posted a cumulative total return of 5.9% through Thursday, compared to a total return of 4% for an ICE index. BofA of high yield corporate bonds, according to CreditSights.

Greater confidence in the health of state and city finances has strengthened the case for munis.

As the coronavirus pandemic shut down much of the U.S. economy, cities and states suddenly expected income deficits to lead to serious budget problems. Investors withdrew about $ 46.1 billion net from municipal bond funds in March 2020, according to Refinitiv Lipper.


Have you put any money in municipal bonds recently? Why or why not? Join the conversation below.

But in many places the tax damage turned out to be less severe than expected. Federal aid to households and businesses supported consumer spending and the economy recovered faster than expected.

Washington’s aid also included $ 350 billion for state and local governments to pay costs related to the pandemic, fill shortfalls, and fund water, sewage and broadband projects. .

“You have good credit, you have the fiscal stimulus, you have the potential for higher taxes,” said Dan Solender, director of non-taxable fixed income at Lord Abbett & Co. “Even though we are in an environment, it makes investors really comfortable investing in municipalities.

Write to Karen Langley at [email protected]

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