Rachel Betton: Hi, My name is Rachel Betton, I am the portfolio Manager in the New York office focusing on municipal strategy.
Today we are going to be talking about the effect of tax reform on supply and demand dynamics.
Due to proposals in the draft tax plan, we saw issuers rush to market with a record $64 billion in issuance in December.
While we expect the pace of issuance to pick up, primary market volumes will likely be significantly lower than last year, which SHOULD be supportive of valuations over the long term.
Switching now to the demand side, despite a decrease in the top federal tax rate, the $10,000 cap on state and local tax deductions will affect high-earners in New York, California and other high tax states.
The chart shows the change in the top marginal tax rate for select states.
As an example, residents in New York City and California, could see their taxes go up by as much as 2-3%. The increase in the top tax rate, should also be supportive for valuations So what does that mean for your investment account?
In light of the supply and demand dynamics we have talked about, the municipal market is setting up to deliver attractive after tax returns this year.
However, it is important to buy selectively and we emphasis independent credit research at the security level, because not all munis are created equal.
Strong supply and demand technicals won’t protect you from bad credits.
A word about risk: All investments contain risk and may lose value. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax.
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