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Is It Time To Buy Munis From Certain States?

Kaight
  |     |   1,192 posts since 2011

Muni yields right now are decent in the first place. But read this article and then think this through with me:

https://finance.yahoo.com/news/us-state-tax-revenue-drops-153449185.html

Munis of certain states will increase in value when/if the state income tax rate increases. Munis are priced on a tax equivalent yield (TEY) basis. When a state tax rate is raised, the TEY for your pre-existing muni from that state heads north, raising the value of that bond.

Course you need to evaluate in advance the financial distress level and politics in (whatever) particular state you might have under consideration, then place your bets accordingly. You can be assured that's what the big money will be doing.

But given muni interest rates today are pretty good, I'm seeing this as a play with limited downside even if you guess wrong, and decent upside if the state you choose gooses their state income tax rate.

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w00d00w
  |     |   360 posts since 2012
comments from the municipal portion of Schwab's monthly bond market update:

Yields are very attractive after considering the impact of taxes. Credit quality is strong and defaults are likely to remain rare. State tax revenues have surged and many states have used the increase in revenues to build up their rainy-day funds.

Credit quality has likely peaked but most municipalities are in a strong position to weather an economic slowdown.
https://www.schwabassetmanagement.com/content/bond-market-update
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