Tax reform is clearly an unknown. President Trump has offered up his proposal around tax reform. The municipal bond market reacted to that after Donald Trump—candidate Trump—was…became President Trump during the month of November, so the market did overreact. It came back a little bit since then. And just looking forward, what paths can it take—and that’s what the market is trying to absorb, to digest.

Could it be the top rate declines to 33%—the top marginal federal rate, that is—and that is Donald Trump’s proposal and that is Paul Ryan’s proposal as well. That may have or could…would have an impact on municipal tax exemption—although municipal tax exemption would still be valuable but perhaps not as valuable if the rate were at 39.6. Or perhaps the top marginal rate on interest income is halved, meaning that it’s half of the top marginal rate of 33%. So that would reduce the value of municipal tax exemption above a taxable bond—although still attractive, just not as attractive. It also could take the form of municipal tax exemption being curtailed in some way. Maybe it’s limited. Maybe you do not get the full benefit of tax exemption, but the government perhaps curtails it to some degree. It’s an unknown.

But there are ways to manage around that, and I think every investor out there—municipal bond investor—should demand that their manager has flexibility to navigate that. And how do you do that? Well, one clear way is to have the ability to invest in taxable bonds, whether it’s US Treasuries or corporate bonds, because those bonds would not be impacted negatively with regard to tax reform. So one way to insulate your municipal tax-exempt portfolio would [be] to have the ability to add these bonds in—and, quite frankly, in many of our strategies, that’s exactly what we are doing in order to provide some protection against tax reform, whatever form it may take.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Clients Only

The content you have selected is for clients only. If you are a client, please continue to log in. You will then be able to open and read this content.