The municipal bond market experienced a dramatic sell-off around the time of the election, with more than $10 billion departing muni funds in November.2 President Trump’s promise for more infrastructure spending and lower taxes has made the market for these bonds less appealing.3
For one thing, many investors are attracted to bonds for their federal tax-free interest income. However, with the prospect of income tax rates dropping over the next four years, this feature may not offer as much value. Second, more government spending means the issuance of new bonds to fund infrastructure projects and, with the recent rise in interest rates, new bonds will likely offer higher yields than existing ones. Furthermore, the current municipal interest tax exemption could even be reduced or cut as a part of tax reform negotiations going forward.4
Municipal bonds provide a steady stream of income, which can be an important factor for retirees. Also remember that older bonds will continue to pay out until maturity.
Bond obligations are subject to the financial strength of the bond issuer and its ability to pay. Before investing consult your financial adviser to understand the risks involved with purchasing bonds.
2 James Schwartz. BlackRock. December 2016. “Near-term caution, long-term opportunity.” https://www.blackrock.com/investing/insights/municipal-monthly. Accessed Dec. 26, 2016.
3 James Dearborn. Columbia Threadneedle. Nov. 29, 2016. “What a Trump presidency means for muni bonds.” https://blog.columbiathreadneedleus.com/what-a-trump-presidency-means-for-muni-bonds. Accessed Dec. 26, 2016.
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