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There's good news and bad news in the municipal bond market today. The bad news is that it has been the worst start to a year in more than 40 years. The good news is that the sharp selloff has created potential opportunities that largely haven't existed for 15 years.
During the second half of the year, we believe the muni market may present opportunities. We suggest that muni investors consider taking advantage of the recent selloff by moving up in both credit quality and coupon structure, and moderately extending duration if they have been investing in very short-term munis.
Thinking about buying a municipal bond at a price below its par value? You may want to think twice, because if it’s acquired at too deep a discount it could be subject to an additional tax, known as the de minimis tax, which would take a bite out of the after-tax return.
In short: The larger the discount, the greater the risk that an investor will face a higher tax rate. Here are some issues to consider.