| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Bull Market Is Coming With Tax-Exemption Deathwatch: Joe Mysak |
Bloomberg - March 2, 2010 - by Joe Mysak
Get ready for what may be a historic bull market in municipal bonds.
States and localities are grappling with widening deficits, soaring pension and benefit costs, as well as political gridlock. Some are even talking about the advisability of entering Chapter 9 bankruptcy. None of this makes a difference.
The game-changer was the proposal last week from Senators Ron Wyden of Oregon and Judd Gregg of New Hampshire to overhaul the U.S. tax system. Among the suggestions: Kill the tax- exemption on municipal bonds and prohibit advance refunding, or refinancing debt before its first call date or maturity.
This is going to produce a rush to market, as bond issuers sell what they fear may be the last tax-exempt bonds and refinance whatever high-coupon debt they still have outstanding.
As much as they sell, it won’t be enough to satisfy demand from investors looking to sink money into one of the last legal tax shelters. The interest rates that issuers have to pay to borrow money will plummet. The last quarter of the year will be frenzied for anyone who works in the market, from issuers to rating analysts to bankers to bond lawyers to investors.
Does this scenario sound far-fetched? There is a precedent, and that was the last time the municipal market faced the threat to tax exemption: 1985.
Driven by Fear
That was the year municipal-bond sales first broke the $200 billion mark -- $207 billion, to be precise. And that was more than double the previous year’s sales, itself a record $102 billion, according to the Bond Buyer newspaper.
In 2009, municipal issuers sold $428 billion in bonds. Is $800 billion in 2010 impossible? It sounds outlandish.
So did the $207 billion sold in 1985. Almost half was sold in the last quarter of that year, with $59 billion coming to market in December alone, still a record for any month of muni sales. It was all driven by fear that the end was nigh.
Even as issuance surged, the rates municipalities had to pay fell. The Bond Buyer’s 20-year index, which measures how much it costs high-grade general-obligation bond issuers to borrow for 20 years, began the year at 9.87 percent, and finished at 8.36 percent. Interest rates overall were falling, of course: Federal funds began the year at 8.25 percent, and ended at 7.75 percent. But this was in the face of record municipal supply, remember.
Abolition Talk
Issuers in 1985 were reacting to a vague set of threats to prohibit certain kinds of tax-exempt bonds, not outright abolition. That didn’t occur until 1986, when Senator Bob Packwood of Oregon proposed subjecting all tax-exempt bonds to an alternative minimum tax, a suggestion that was watered down shortly after it was broached.
The Wyden-Gregg legislation is much more of a menace. Unless the whole notion of reforming the tax system is strangled in its cradle, which is doubtful, municipal-market participants should treat this as serious business.
There’s nothing protecting tax-exemption as a right. The constitutional basis for tax-exemption was struck down by the U.S. Supreme Court in 1988. In 2009, states and localities showed how easily they could be bought off by the introduction of Build America Bonds, whose 35 percent interest-rate subsidy made borrowing taxable cheaper than borrowing tax-exempt.
Tax Dodge
Maybe Congress will provide issuers with a similar subsidy for all of their bonds. Maybe it will set up special credits for investors. Or maybe Congress will do nothing at all except kill the tax exemption. A lot can happen to legislation as it is being negotiated and debated.
Let’s just say that tax exemption is outlawed in 2011. What happens?
On the plus side, all the arbitrage scams cooked up by clever bankers that have bedeviled the market for the past two decades, such as the almost unexplainable matter of yield burning, would disappear. Just about all of them spring from bond issuers having to comply with numerous restrictions on how much they can earn on tax-exempt proceeds.
The U.S. Treasury has long considered the municipal market a tax dodge for rich people. Of the 143 million tax returns filed in 2007, the latest date for which information is available, 6.3 million, most in the top income brackets, claimed $76 billion in tax-exempt interest. That figure would increase a bit with the market’s last hurrah in 2010, and dwindle thereafter.
Why Buy?
On the minus side, it would cost a lot more for states and cities to borrow money. The composition of the market would change, from one dominated by individual investors to one that was almost entirely institutional.
Why would any individual want to buy municipal bonds, which are particular and specific to a remarkable degree, without the lure of tax-exempt yield? As a taxable instrument, they almost couldn’t pay individual investors enough to try and unravel the weird structures and convoluted credits. Recall, too, that insurance no longer makes municipal bonds a AAA commodity as it once did. Standing on their own, state and local bonds are often inexplicable, and frequently scary.
Last call for tax-exempts!
Click on “Send Comment” in the sidebar display to send a letter to the editor.
--Editors: David Henry, James Greiff.
-0- Mar/02/2010 02:00 GMT
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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