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The Muni-Bond Buyer's Election Guide

Tyler Durden's picture


The muni market is not yet fully pricing in potential negative outcomes around tax reform, for which both candidates propose reforming tax rates and treatment of investment income, including muni interest, in a demand-negative fashion. Morgan Stanley summarizes the muni credit outcomes of competing reform proposals for healthcare, defense, and entitlement spending, among others. The tax treatment of munis would be at risk under either an Obama or Romney administration.

The political climate is such that 2012 campaign promises are potential near-term catalysts, not empty rhetoric. The electorate is deeply divided on deficit reduction and economic stimulus, and the “fiscal cliff” makes action on these issues imperative. Thus, resulting campaign proposals for tax, budget, and regulatory reform are key credit and market drivers for munis.


In aggregate, both policy sets are likely negative for munis’ tax value and a headwind for performance, though it is difficult to state if one set is definitively better than the other.

Election Outcomes, The Fiscal Cliff and Tax Value For Munis


However, we believe the muni market may need to reach yields equivalent to other credit options, at least temporarily, given that both proposals include the possibility of impairment of munis’ absolute or relative tax value.

Summary of Possible Tax Proposal Outcomes and Combinations


Based on the set of policies under consideration, we believe it’s a strong possibility that, at a minimum, a modification or elimination of the muni exemption is likely to find its way into a reform bill, at least temporarily, which suggests the market might price out the exemption out of caution.


Opposing Election Platforms Means Policy Uncertainty

 Obama and Romney have opposing positions on several issues that may impact the municipal market. With recent polling data indicating the race is a close race, there is much uncertainty surrounding election outcomes and important policy issues.


Full Election Guide fro Muni bond holders:


Muni Overview

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Tue, 10/16/2012 - 19:04 | 2896375 vast-dom
vast-dom's picture

Pioneering High-Speed Trading Executives Shut Firm



Tue, 10/16/2012 - 19:23 | 2896400 CPL
Tue, 10/16/2012 - 19:30 | 2896426 CPL
CPL's picture


Tue, 10/16/2012 - 19:36 | 2896447 The Alarmist
The Alarmist's picture

It will be interesting when Gary Johnson gets taken down ... only one making coherent points when given a moment in front of a camera and microphone, so he must go down.  As for Jill, well, that is just weird.

Tue, 10/16/2012 - 19:04 | 2896377 CreditcalMass
CreditcalMass's picture

The 28% cap matters more than anything to the municipal market, and the general consensus is that it won't be touched, as it will severely damage the ability of municipalities to borrow.

Tue, 10/16/2012 - 19:08 | 2896386 turbosuperman
turbosuperman's picture

Aren't we supposed to see a bunch more muni defaults soon?

If Gerald Ford was forced to bailout NYC, then there's no doubt that Obamney and Dr. Bernanke will (try to) bailout everyone too.

I guess they could bail them out and then tax munis at 100% to get the bailout money back.

Tue, 10/16/2012 - 19:42 | 2896451 Lost Wages
Lost Wages's picture

A muni bond collapse is something that has been predicted for a couple years and hasn't happened yet. Meredith Whitney lost some credibility over that call. If cities declare bankruptcy, they probably won't be allowed to default on the bonds OR on their pensions. Jim Sinclair is guessing they will be bailed out by more QE. I think that is the reason my parents' financial advisor has them in munis, but I wouldn't want to have my money in there. Seems rather risky for a retiree, but what isn't these days? 

Tue, 10/16/2012 - 20:00 | 2896487 turbosuperman
turbosuperman's picture

Yeah, predicting timing is very difficult.  We all see these problems and know what the outcome will be, but we can't really know when it will happen.

There's some quote I can't remember exactly but it's along the lines of:

The crisis takes much longer to arrive than you think it will, but once it arrives it plays out much faster than you thought it would.

There's a Hemingway quote along those lines too:

"How did you go bankrupt? Two ways. Gradually, then suddenly."

I guess Bernanke could buy munis directly - might as well at that point.  I mean, that doesn't really solve anything, though.  If some major city gets in trouble like New York did, I really don't see the Federal government/Federal Reserve not doing anything.  But, at the same time, the Federal government and the Fed aren't looking too sound these days, either.

Tue, 10/16/2012 - 22:09 | 2896908 cynicalskeptic
cynicalskeptic's picture

Astounding how long you can keep kicking that can down the road.....   Got out of Munis a couple years back when seeing that even revenue backed issues might be having issues - NYS Thruway, MTA - all are raising rates big time and STILL having budget problems.  

When you talk about Feds bailing out local I have to laugh - government at all levels is competing fpr a larger slice of a diminishing pie.  Feds grab more at the expense of local - while sticking local governments with more costs and mandates - local taxes skyrocketing while deficits gorw.  HUGE shortfalls in gove pensions (BECAUSE there's NO real interest paid on ANY funds).  So - local governments going broke despite higher taxes imposed are supposed to count on getting more back from the Feds who are CUTTING aid and increassing THEIR take?

You ARE seeing more and more localities having major budget problems - and though we haven't seem massive defaults yet, it's all too possible.

The fundamental problem is that with NO real interest paid by ANY savings vehicle people are going to higher and higher risk - you think THAT is going to work out well?   Funny how people will end up fleeing to 'safe' T-Bills as higher risk implodes - only delaying the Federal implosion.

Tue, 10/16/2012 - 19:09 | 2896388 toomanyfakecons...
toomanyfakeconservatives's picture

You can package toilet paper any way you like, but it's still toilet paper. The world wants it's decades stolen gold back and the 150-nations BRICs alliance can flip a switch and dump the U.S. dollar anytime!

Tue, 10/16/2012 - 19:23 | 2896409 Ham-bone
Ham-bone's picture

A simple question for Obama tonight (I'll get to Romney later)-

CBO assumes (under current law) that:

-Tax revenue will rise from 15.7% in '12 to 19.6% of GDP in '14

-Outlays will remain unchanged as a % of GDP

CBO expects that given higher taxes, lower growth in government spending, and ever lower interest rates that the economy will expand at 4.3% annually from 2014 through 2017. This after real US GDP has grown by 1.7% annually since 2000. I'm confused why significantly higher taxes and lower government spending will result in a near tripling of GDP? Thoughts???

Wed, 10/17/2012 - 10:02 | 2897849 marathonman
marathonman's picture

CBO = Complete bullshit organization

Tue, 10/16/2012 - 19:34 | 2896433 q99x2
q99x2's picture

It can't happen here. I'm telling you my dear. Who could imagine that they would freak out in LA LA LA LA land.

Tue, 10/16/2012 - 19:33 | 2896438 ShrNfr
ShrNfr's picture

The great sucking sound you hear is CA going down the toilet if it has to pay any higher rates soon. Otherwise, it will just ripen a bit before it gets flushed.

Tue, 10/16/2012 - 19:34 | 2896441 Dr. Engali
Dr. Engali's picture

I have a bearish case for muni bonds.... they're over priced junk.

Tue, 10/16/2012 - 19:39 | 2896443 Insideher Trading
Insideher Trading's picture

If you could tax all the rainbows, magic, and unicorns these candidates have been selling there would be no debt problem, anywhere in the world.

If in conjunction, you could tax the rumors coming from European leaders, every country in the world could manage massive surpluses.

With that in mind all other taxes can be reduced to 0 and we could increase spending ad infinitum.

Tue, 10/16/2012 - 19:37 | 2896448 The Alarmist
The Alarmist's picture

The current tax advantage of muni bonds is an anacronism from the days before Revenue Sharing and when the States actually mattered.

Wed, 10/17/2012 - 06:12 | 2897491 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

If you are thinking any further erosion of the Principles of Federalism is a good idea, I advise you to reconsider.

Tue, 10/16/2012 - 20:01 | 2896488 Dr. Sandi
Dr. Sandi's picture

Local funding of local needs will once again return to the realm of necessity. Once daddy's money stops flowing into town, the locals will only fund stuff they actually need.

Maybe the job-boosting construction of the billion dollar superjail will have to wait until we have enough criminals in hand to fill it. Perhaps the empty bus line to nowhere won't get so many new buses if they have to come from real money again. And what if the new edifice to the egos of the county government can't be constructed because no federal grants can be found to pay for the remaining 90% that doesn't exist locally.

Chaos, I tell you, on a citywide or even regional level. And a lot of politicians' spouses, in-laws and shadow partners would be looking for new cows to milk.

Tue, 10/16/2012 - 22:20 | 2896960 cynicalskeptic
cynicalskeptic's picture

Local funding is getting cut drastically - often in ways NOT wanted by local officials or residents because they HAVE to fund things like pensions and cover mandated costs.  We're in a beggar thy neighbor mode where the locals are at the bottom of the shitpile.  Feds demand more and dump more costs locally - States do the same and your local gov gets screwed.  Our local property taxes have TRIPLED in less than 20 years - in large part because of mandated pension costs for employees that get to retire after 20 years - whose pension funds get slaughtered with market downturns (nobody makes up lossses in MY 401K).   'Investmetns' sold to local govs by slimeball banks and Wall Street have LOST tons of money further worsening things.

The irony in all this is that UNNECESSARY spending continjues unabated.  Politicians give out $$$ like there's no problem.  Here voters voted DOWN things like an artificial turf field (WTF?) but local sports fanatics started raising private funds AND got a government 'grant' of a few hundred thousand).WTF?  THE MAJORITY voted this down and god knows there's better things to spend money on.   It's VOTE BUYING - at ALL Levels.COrporations get sweetheart contracts for things the military doesn't even want.  Rich get tax cuts and incentives.  Middle class gets governemtn grants.  Poor get all kinds of aid.   But meanwhile local streets are undrivable and streetlights are turned off because there's no money to pay the electric bill.

Wed, 10/17/2012 - 06:09 | 2897488 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

Why else would you invest in a muni-bond over others, except for the tax exemption?

This will greatly accelerate the speed of muni-defaults, which is probably the point.

Wed, 10/17/2012 - 23:15 | 2900026 Muppet
Muppet's picture

yikes.  i hold substantial muni's.

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