Muni Bond Demand Trends Shift Under New Tax Rules

The recent overhaul of the U.S. tax code effective beginning 2018 has made an early impact on the demand landscape within the $3.8 trillion municipal bond market. Under the new rules, one of the most significant changes is a drop in the corporate tax rate to 21% from 35%, which makes tax exempt municipal bonds less appealing for institutional investors such as banks and property and casualty (P&C) companies. In fact, recent data from the Federal Reserve “Fed” showing the quarterly changes in municipal holdings confirmed that banks reversed a recent buying trend and reduced holdings of municipal debt while P&Cs, somewhat surprisingly, held their exposure steady.