Patrick Luby is the municipals strategist with CreditSights Wealth.
While Puerto Rico continues to dominate the muni market headlines, trading in Puerto Rico bonds has totaled less than 3% of muni trading volume so far this quarter (through May 15, according to MSRB data from Bloomberg).
With the bulk of attention focused elsewhere, muni yields have generally moved lower so far this year, lifting most of the muni indices into positive territory. Bond prices rise when yields fall.
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President Trump’s proposed change in the maximum federal income tax bracket from 39.6% to 35% has a larger impact on municipal bond taxable equivalent yields (TEYs) than may be expected, but muni yields at their present levels will still be attractive versus taxable bonds, even with the slight decline in the max tax rate.
For example, 2.50% tax free = TEY 4.14% at 39.6% and 3.84% at 35%. The proposal to eliminate the alternative minimum tax could be a boon for current holders of AMT munis, which have historically traded cheaper (high yields) than non-AMT munis. However, buying AMT munis now with the expectation of a “pop” in prices would be speculative.
The elimination of the deductibility of state and local taxes from federal income taxes could make double- or triple-exempt munis more attractive relative to taxable investments.
Year-to-date, the 37 muni bond ETFs have attracted almost $1.4 billion in net new assets, bringing total AUM to $26.5 billion. Most of the activity in muni ETFs, however, has been in trading, with the ratio of dollar volume traded to net flows at more than 14:1 ($19.3 billion traded to $1.3 billion in new assets).
The iShares National Muni Bond ETF (MUB), the largest of the muni ETFs, having $8 billion in assets, dominates the trading, with $7 billion traded this year, even though its AUM is down $272 million.