Municipal Bonds: Supercharged Returns in 2020?
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What is the main topic discussed in this episode?
Here's your money briefing for Tuesday, January 7th. I'm J.R. Whalen at The Wall Street Journal in New York. High-income households looking for relief from the limits on state and local tax deductions poured record amounts of money into mutual funds that invest in municipal bonds last year. We'll check in with Wall Street Journal reporter Heather Gillers to find out if that investment has paid off and if 2020 is expected to be just as strong for the muni bond market. First, some money and market news you should know. It's been a happy new year so far for the CEOs of S&P 500 companies. The AFL-CIO labor union says that on average, they earned $111,500 in the first two days of the year. That's more than the typical employee earns the whole year.
In total, CEOs made an average of $14.5 million for the year, much of that from stock. The Department of Labor says the median income for U.S.
Why did municipal bond mutual funds see record inflows in 2019?
full-time workers is just under $48,000 per year. And economists are calling into question the more than $30 billion in tax incentives and breaks that state and local governments spend every year to get companies to call them home. A study by economists at Columbia and Princeton business schools show that while the largest incentives result in job growth in the targeted industries, they don't produce the hoped-for benefits for the broader regional economy. Researchers also found that larger, more profitable companies are more likely to get better incentives, and states tend to offer more incentives when governors are up for reelection.
Which investors and states drove the surge into muni bond funds?
Municipal bond mutual funds were among 2019's hottest investments. The S&P Municipal Bond Index rose more than 7% last year, and the popularity of funds containing municipal bonds is expected to be strong in 2020 as well. Let's bring in Wall Street Journal reporter Heather Gillers to explain. So Heather, where was the money coming from that drove record inflows into the muni bond fund market last year?
Overwhelmingly, it was coming from affluent taxpayers in higher tax states. So California, probably most of all, also places like New York, New Jersey. And that's because the 2017 tax overhaul placed limits on how much taxpayers could deduct from their federal tax bills based on the amount of state and local taxes they were paying.
How did the 2017 tax overhaul change municipal borrowing and supply?
So all of a sudden, state and local tax bills became much more burdensome, particularly for wealthier people in high tax states. And those people started looking for a place where they could get tax relief. And one of the only places really is municipal bonds. Municipal bonds throw off interest that is exempt not only from federal taxes, but also from state taxes in the state where those bonds are issued.
And the tax law also had a profound effect in how municipalities borrow money.
The tax law has really reshaped the municipal market in a number of ways. For municipalities, what happened was they were no longer allowed to do certain types of refinancing, early refinancing deals. That's where the municipality issues a bond to pay back an outstanding bond with the hope that it will cut their interest costs.
Why are municipalities choosing to borrow more when interest rates are low?
Usually they do that when interest rates have fallen, sort of like you might refinance your home mortgage. So that was a pretty robust source of municipal bonds in the market were these early refinancings. And those were eliminated by the federal government in the 2017 tax overhaul. It was a moneymaker for the federal government because previously the federal government was not allowed to collect taxes on the interest on taxes. these refinancing bonds. So what would happen is you would have two sets of bonds throwing off tax exempt interest for the same debt. And so by ending the use of the tax exemption for these early refinancings, the federal government could collect more taxes or at least avoid giving so many tax breaks.
But for municipalities, That meant fewer bond issuances. And the end result has been to limit the flow of bonds into the municipal market more than in the past. And furthermore, to drain tax exempt bonds further.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:59
2
Why did municipal bond mutual funds see record inflows in 2019?
0:59–1:42
3
Which investors and states drove the surge into muni bond funds?
1:42–2:35
4
How did the 2017 tax overhaul change municipal borrowing and supply?
2:35–3:31
5
Why are municipalities choosing to borrow more when interest rates are low?
3:31–6:05
6
Why do investors prefer municipal bond mutual funds over buying bonds directly?
6:05–7:38
7
What risks arise from growing concentration of munis in mutual funds?
7:38–8:29
Speakers
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