There’s One U.S. Market That Loves the GOP Tax Bill

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Yesterday a man called and asked why it was so hard to find California municipal bonds.

He referred to himself not as an investor but a collector, which isn’t the first time someone has likened the municipal market to numismatics or philately, where you have to know a lot about the subject at hand. I told him the objects of his affection were going to get simpler, but rarer, too.

It’s all the result of the tax deliberations in Congress. The lower-house version of the GOP tax reform plan would effectively throttle muni-bond sales in years ahead, and buyers — or “collectors” like my caller yesterday — are scooping up the existing securities in anticipation of this shortage. That has triggered a torrid rally for the sector, now up 0.61 percentage points month-to-date, a move that stands in stark contrast with the sell-offs in stocks and the dollar that the tax debate has stoked.

“If this plan is implemented in its current form,” wrote analysts led by Vikram Rai at Citigroup in a piece published on Nov. 8, of the House GOP tax reform plan, “municipal issuance could shrink and tax-exempt issuance will shrink dramatically thus increasing its scarcity value.”

The House version of tax reform calls for an end to tax credit bonds, tax-exempt stadium finance, advance refundings and private activity bonds. Which means at least one-third and perhaps as much as 40 percent of the municipal market issuance would end with it.

The Senate version of tax reform, released Thursday night, is silent on everything except advance refundings, which it wants to abolish, too.

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