What to Expect from the Muni Market in 2018

By Joe Gotelli - January 26, 2018

The municipal asset class has historically been somewhat insulated from the effects of natural disasters. 2017 put that resiliency to the test as state and local governments dealt with hurricanes, floods and wildfires.

While the municipal market was generally unscathed by these natural disasters—outside of the impact to Puerto Rico—we did not dodge the changes coming out of Washington, D.C. The Tax Cut and Jobs Act of 2017 included provisions that will have a meaningful impact on the municipal market going forward.

The elimination of municipal issuers' ability to advance refund  older, higher-cost debt in the tax-exempt municipal market accelerated issuance of these types of deals into the fourth quarter of 2017. This acceleration of deals has led to lower supply forecasts for the first quarter of 2018. The loss of tax-exempt advance refunding could potentially reduce supply by 15-20% annually.

For individuals in high income tax states such as California, New York and New Jersey, the capping of state and local tax deductibility at the federal level should increase the relative value of tax-exempt income for those investors.

In the context of stable fundamentals and the impacts of tax reform, what do we expect this year? What sectors do we favor and what are we on the lookout for? I touch on all things muni in the video below.

Joe Gotelli
Joe Gotelli
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      Advance refunding: A bond issuance in which new bonds are sold at a lower rate than outstanding ones. The proceeds are then invested, and when the older bonds become callable they are paid off with the invested proceeds.

      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.