The largest exchange traded fund that invests in municipal bonds fell sharply Wednesday as President Obama held the first press conference of his second term and stood by pledges to raise taxes for wealthy Americans.
“Investors had been flocking to tax exempt munis since taxes are now expected to go up across the board, so it’s surprising to see the sharp reversal on a day in which the President held a press conference sharpening his stance on the tax issue,” Bespoke Investment Group said.
“Are investors all of a sudden expecting the tax hit to not be as bad, or are they simply selling any liquid assets they can find to raise cash? Perhaps there is a fear on the part of investors that any possible deal will include a combination of higher rates and limits on deductions,” the firm said on its blog. [Tax Debate Puts Dividend, Muni Bond ETFs in Focus]
Some high-profile investors such as Bill Gross, manager of PIMCO Total Return ETF (BOND) , have been loading up on municipal debt on expectations taxes will rise following Obama’s re-election. [Muni Bond ETFs: Yield, Safety and Tax Advantages]
“Muni bonds, which are tax-free, would be a valuable type of asset going forward,” Gross told Bloomberg.
Wealthier investors like muni bonds for their tax breaks, but there has been some talk recently of taking away the tax exemption.
“The tax-exempt status of municipal bonds, which makes them particularly attractive to high-net-worth investors, is up in the air as Congress wrestles with the fiscal cliff,” Investment News reports. “Any changes to the tax status of the bonds could send notoriously fickle municipal bond fund investors fleeing for the exits.”
However, these rumors have been around for decades and nothing much have come out of them.
While changing the tax policy that applies to munis has been discussed in the past, each time it has induced major pushback from municipal investors and issuers, said Matt Tucker, head of fixed-income strategy at BlackRock’s (BLK) iShares.
“While any such change would obviously have an impact on the markets, we do not believe significant tax overhaul that would change municipal bonds’ tax-exempt status is likely to happen,” BlackRock analysts added. “In our view, there is too much support of the current exemptions to allow for drastic changes.” [As the Fiscal Cliff Looms, Investors Favor Muni ETFs]
iShares S&P National AMT-Free Municipal Bond Fund
Update — Full disclosure: Tom Lydon’s clients own BOND.
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