In the 1Q 2019 issue of our quarterly publication, we:

  • Explore the state and local tax implications from the new tax reform legislation, from a market supply and demand perspective.
  • Analyze the potential effects of the new tax law from a credit perspective.
  • Provide data on the municipal market’s performance in the first quarter of the year.

Strong technicals fueled first-quarter market performance as uplift from robust demand and moderate supply led to positive returns. The S&P Municipal Bond Index turned in a strong 3-month total return of 2.761%. This was well ahead of performance of 1.356% for all of 2018. Analysts and investors attribute some of the tailwind to added demand created by the Tax Cuts and Jobs Act of 2017 (TCJA). Returns filed for tax year 2018 are the first to incorporate the $10,000 cap on state and local tax (SALT) deductions, so many taxpayers have only recently seen the effects of the law passed in late 2017. Particularly in states with high taxes, investors are seeking investments that minimize taxable income on federal tax returns. This could continue to support demand for municipals.

Tax reform also affected supply by eliminating most advance refundings, a tool used by municipalities to lower borrowing costs. The supply/demand imbalance has driven up municipal bond prices and powered performance.  Since mid-January, flows of incoming cash from investors moving into municipal bond mutual funds were at weekly levels as strong as $3.26 billion. This represents a marked turnaround from the consistent outflows experienced last quarter.

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