At the end of this year, a combination of federal tax increases and spending cuts kick in if Congress fails to act. We call it the Fiscal Cliff.
Risks of the cliff weigh on the municpal bond market but some can be controlled. Read on.
The team at Oxford Financial offered a concise look at the Fiscal Cliff and municipal bonds in the current issue of Worth magazine.
“On the positive side, an increase in taxes will also increase interest in tax-sheltered sources of income, including municipal bonds. Municipal bond prices may rise above what they would otherwise be, and yields may fall even further.
But issuers that need appropriations from Washington to fund their debt service could be in trouble. This includes some transportation bonds, and local economies heavily dependent on military spending.
To minimize the downside of the fiscal cliff, investors should avoid issuers that rely on federal appropriations. Focus instead on cities, states and municipal utilities whose internally-generated revenues are adequate to pay the interest and principal on their debts.”
I know how to help control the cliff.
Until next week,
Susan R. Linkous
Municipal Bond Notes
The tax-free income opportunities and occasional chance for capital appreciation offered by these bonds must be weighed against the potential loss of principal due to default, rising interest rates or failure to hold bond until maturity. Interest income can sometimes be subject to alternative minimum tax and although federally tax-free, state and local taxes may apply.