Higher federal taxes = cheaper muni bond debt?

| NY Torch

The analysts at Municipal Market Advisors think that should Sen. Barack Obama win tonight, President Obama’s planned income-tax hike on individual households earning over $250k could push up demand for tax-exempt municipal bonds.

The researchers note that “90 percent of the approximately $700 billion of household-held munis were owned by individuals with at least $2 million in net worth.” Such households — many, although not all, of which take home $250k+ annually — would seek ways to avert taxes, and investing more money in muni bonds is a way to do so.

Greater demand for munis in the next few years would push down the interest rates that municipal issuers have to pay to service such bonds, all other things being equal.

However, all other things aren’t equal. The jammed capital markets over the past two months mean that there’s plenty of pent-up demand on the part of municipal issuers out there. Last year, MMA notes, muni issuers were able to float $7.5 billion each week around this time last year; this year, it’s been about $5 billion a week, and “price discovery and liqudity will remain difficult.”

Since mid-summer, muni investors — the people and institutions buying those bonds — have demanded record interest rates relative to supposedly risk-free U.S. Treasury bonds.

The Fed, through its own rate cuts, has tried to push down interest rates across the board. But so far, investors in everything from muni bonds to residential mortgages just aren’t listening.

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