(Yahoo!) -- Municipal bonds are excellent choices for investors seeking a steady stream of tax-free income.
Usually, the interest income from munis is exempt from federal tax and may not even be taxable per state laws, making these especially attractive to investors in the high tax bracket looking to reduce their tax liability.
Though the tax reform (or cuts) put muni bonds under pressure, things are giving different cues of late. Per etf.com, demand for muni bonds is likely to stay strong in the coming days as taxpayers of seven states (California, Connecticut, Minnesota, New Jersey, New York, South Carolina and Wisconsin) have not been benefited that much from the tax overhaul.
Some States End Up Seeing Higher Tax Rates
There is limitationon the deductibility of state and local taxes from federal taxes for taxpayers of the said states.The etf.com article went on to mention that “even with the reduction in the maximum federal individual income tax rate from 39.6% to 37%, the cap on the SALT deduction means the combined state and federal maximum effective income tax rates went up in seven states.”
Democrats’ Talk of Increasing Taxes on the Rich
A divided congress in the United States has been boosting the Fed. It is said that progressive Democrats want to keep raising tax rates on the wealthiest Americans as key part of their agenda in 2020’s presidential election, per Bloomberg.
The move will address the rising dissatisfaction with income inequality, per Bloomberg.
The Democratic capture of the House of Representatives in midterms in 2018 also flared the buzz.
U.S. Representative Alexandria Ocasio-Cortez, a New York progressive, has pledged to nearly double the top marginal rate to 70% on income above $10 million. Senator Bernie Sanders has “proposed an estate tax including a rate of 77% on the value of those above $1 billion.”
Dovish Fed
Apart from the said causes, the Fed also came up with dovish comments. First, minutes of the Fed’s December gathering released on Jan 9 indicated that still-subdued inflation led the central bank to consider a “patient” approach to future rate hikes.
Then at month-end, the Fed conducted its two-day meeting where it opted to leave the federal funds rate unchanged.
Moreover, Fed Chair Jerome Powell previously indicated that the central bank’s balance sheet normalization plan was on “autopilot.” But the Fed has now turned completely dovish by being ready to “adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”
This clearly shows that the course now is not on autopilot.
Such statements kept U.S. treasury yields at subdued levels with the 10-year U.S. treasury yield currently hovering around 2.66% levels from the one-year high of 3.24% hit in early November 2018. No wonder, overall bond ETF investing is seeing a great time in 2019.
Tax Season
U.S. citizens are currently under the tax season which runs from Jan 1 to Apr 15 of each year. During this time, individual taxpayers normally prepare financial statements for the previous year and file annual tax return by Apr 15. No wonder, munis will attract huge attention.
Munis Are Hot
All theseperked up demand for muni bonds, which are safer than corporate bonds and yield higher than treasuries. So far this year (through Feb 13), 24 muni ETFs have seen assets growing, while 12 have seen assets gushing out, noted etf.com. The overall clip of muni ETF trading (based on market value traded) is more than 45% heavier than last year, per etf.com.
Funds focused on state and local government debt hauled in $3.3 billion of cash in the week through Feb 6, marking the biggest weekly inflow since at least 2007, per Investment Company Institute data.
