Our Perspective
TAX REFORM AND MUNIS – JANUARY 2017
Municipal bonds are less attractive to corporations if the after-tax yields are comparable to taxable alternatives. As you can see
below, the largest increase in municipal holdings over the past several years has come from institutional investors with U.S.
Banks (+139%) and Life Insurance companies (+187%), while mutual funds have increased only 50%. Municipal bonds have
provided attractive after tax yield versus other taxable fixed income investments, which has led to the strong growth in corporate
holdings. Municipal bond yields would have to increase a minimum of 60bps in order to compensate for the reduction in the
corporate tax to 25%.* Therefore, the lowering of the corporate tax rate, which we think is highly likely, is likely to limit market
liquidity and increase market volatility by lowering institutional tax exempt demand.
Source: Fed Flow of Funds, J.P.
Morgan as of 9/30/16
2017 will likely be a very volatile year for municipal bonds due to headlines surrounding tax policy, much like the final quarter of
2016. While we feel strongly that tax exemption will be maintained for municipal bonds, market volatility will remain high due to
policy uncertainty and possible shifts in investor demand going forward.
*According to Morgan Stanley 1/5/2017 “Muni Strategy Playbook”
The assertions in this perspective are Seix Investment Advisors’ opinion.
Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the
potential for principal gain or loss.
Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally,
a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local
taxes and, depending on your tax status, the federal alternative minimum tax.
There is no guarantee a specific investment strategy will be successful.
This information and general market-related projections are based on information available at the time, are subject to change without notice, are for
informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for
individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not
intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed.
This information may coincide or
conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix
Investment Advisors does not provide legal, estate planning or tax advice.
Investors are advised to consult with their investment processional about their
specific financial needs and goals before making any investment decisions.
Past performance is not indicative of future results.
©2017 Seix Investment Advisors LLC. Seix Investment Advisors is a registered investment adviser with the SEC and a member of the RidgeWorth Capital
Management LLC network of investment firms.
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