Uncle Sam’s debt woes create opportunity for muni buyers
Uncle Sam is digging a hole that only taxpayers can fill. That’s why advisors are plugging their high-net-worth clients’ portfolios full of tax-free municipal bonds.
The Congressional Budget Office said this week that the federal budget deficit for the first six months of fiscal 2024, ended in March, was $1.064 trillion. For the full year of 2024, the CBO sees the budget deficit totaling $1.5 trillion, a decrease from the $1.7 trillion deficit in 2023 that was the third-largest in American history.
Like it or not, those bills are going to have to be paid. And that means the folks down in Washington will be figuring out ways to hike taxes however and wherever they can, on top of selling new bonds to pay for the old ones.
Since interest income from munis is exempt from federal income tax and munis issued within a client’s home state are generally exempt from state and local taxes, muni bonds will increasingly become a haven for the well-heeled as taxes rise. And while the market has seen explosive growth in Treasury and sovereign issuance, the same can’t be said on the muni side.
Meanwhile, outside the nation’s capital, the country’s municipalities are showing strong credit fundamentals, said Dan Close, head of municipals at Nuveen.
“Right now, state and local governments have $290 billion on their balance sheets from five rounds of COVID finance,” he said. “They are prepared to take anything that comes our way in an economic downturn.”
Close added that the rating agencies have upgraded munis by a factor of 4 to 1 over the past three years. On the other hand, the nation’s credit rating is heading in the other direction, with Fitch downgrading the country’s long-term credit rating last August to AA+ from AAA.
“If you
Read more on investmentnews.com
