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Quick Takes: Tax Aware Investing

Rachel Betton, senior vice president and municipal bond portfolio manager, discusses how recent U.S. tax reform is positively affecting supply and demand dynamics in the municipal bond marketplace, creating a tailwind for valuations.

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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.

Disclosure


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.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. Investors should consult their investment professional prior to making an investment decision.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.  Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626 ©2018, PIMCO

CMR2018-0531-335758

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