The problem with tax reform: there’s many rabbit holes here and it will impact municipalities.

The impact on municipalities is this: tax reform, if it reduces the benefit of tax exemption, and yields then would have to reset, perhaps, meaning higher, so the cost of issuing debt for municipalities would be greater.

And who does that fall on, that cost? It is going to fall on taxpayers. Is that what politicians want? And one of the issues here is that we have a big, lumbering lobby group, quite frankly, in the form of state and local governments. Takes them awhile to get going, but once they do get going, they’re a force to be reckoned with.

And we’ve seen that a little bit, they’re rearing their head, but I think they’re going to push back a great deal on tax reform because of the impact it will have on taxpayers. But it will be, outside of that, the cost to municipalities will certainly rise because their yields will have to reset a bit higher if tax reform does take place.

Municipal tax exemption regarding tax reform, if it’s impacted somehow, investors, we believe, will always look at it, tax exemption, in a max-after-tax type of fashion. They’ll always gauge municipal tax exemption versus a taxable bond—“am I earning enough spread to own that municipal over the taxable bond.”

So, there will be a reset in yields, most likely. There will be a reset in after-tax spread. And all investors will have to make that determination. We believe that there will still be, no matter what path it takes for the most part, that there will be a spread where municipal tax exemption or municipal bonds will be more attractive for most investors versus a taxable bond.

The question is: how much more attractive is it? Are you earning ninety basis points, fifty basis points, thirty basis points above that taxable alternative? But whatever it is, it’s something. And I think again it gets back to your manager having flexibility and deciding that for you.

So having that ability to meld taxable and tax-exempt bonds into one portfolio to provide the greatest after-tax return may be more important going forward than it ever has been.

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.

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