What’s behind the rush of investors snapping up a flood of municipal bonds?
It’s simple: The supply of munis is about to drop dramatically.
Beginning next year, analysts say, new sales of tax-exempt bonds could fall by a third or more, a result of the tax overhaul working its way through Congress.
Anticipating the law’s elimination of certain exemptions after the new year, state and local governments are moving quickly on their bond sales while investors are plunging into the market as they see a shrinking muni supply on the horizon.
Some muni bond exemptions expected to be eliminated
Though House and Senate negotiators are attempting to work out differences in their respective tax overhaul bills, it’s widely expected that a final bill will eliminate at least some muni tax exemptions.
The House proposal calls for eliminating the exemption on private activity bonds, a financing tool used to leverage private funds for building airports, hospitals, universities and other projects.
Both the House and Senate bills would remove the tax exemption from bonds in advance refundings, which issuers use to refinance tens of billions of dollars in debt.
Muni bond sales surge ahead of new law
The prospect of losing the exemptions has prompted a tear of bond sales. Analysts said last week more than $17 billion in new issues were scheduled, while it looks like state and local governments are on track to equal or exceed the monthly record of $54.7 billion in bond sales reached in 1985.
Of course, accurately predicting which exemptions survive, if any, is impossible.
As we noted previously (“Attacking Certain Munis Imperils Infrastructure Goals”), eliminating private activity bonds runs counter to the president’s stated goal of leveraging private funds for a massive increase in infrastructure spending, so whether PABs survive the congressional negotiations remains a question mark.
Regardless, the market’s reaction is clear: The supply of municipal bonds will likely soon shrink. The present time is a unique, limited-time only opportunity in which the needs of buyers and sellers coincide.
