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BUSINESS Monday 10 april 2017
A25

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Fall, recover, repeat: Munis rebound from sharp drops, again

benefit. Even if tax reform and an
Beyond that, investors wor- infrastructure program do
ried that a big infrastructure pass, the effects may not
program from Washington be as bad for the mar-
could mean a deluge of ket as many had feared.
new municipal bonds hit- A drop in the top tax rate
ting the market and over- would likely hurt muni bond
whelming demand from prices but doesn’t have to
buyers. be a catastrophe. Munis
November’s tumble in pric- held their own after Presi-
es for munis followed ear- dent George W. Bush en-
lier sell-offs, such as in 2010 acted tax cuts in 2001, for
and 2013. But this past one example. And the federal
didn’t last as long as those. government could make
“That was the most interest- sure bonds for infrastruc-
ing part of this particular ture get issued outside the
sell-off in November, how tax-exempt market.
quickly it reversed,” says Now, regular investors are
Karl Zeile, portfolio man- coming back to the mar-
ager at Capital Group. “It ket. They’ve put more
really lasted only about money into muni funds
four weeks, and then the than they’ve taken out for
market woke up to over- three straight months, after
Specialist Meric Greenbaum, center, works on the floor of the New York Stock Exchange. The sold valuations and started fleeing in November and
municipal-bond market used to be a reliably boring one, but in the last decade, the muni market
has been all-too-interesting and whipped investors through several sell-offs. moving.” December.
(AP Photo/Richard Drew) Part of it is who was doing So, how much is fair for
the buying. The muni mar- them to expect in returns?
STAN CHOE their losses and look to be tions for the White House, ket is usually dominated by One benchmark index that
AP Business Writer on their way to erasing yet Senate and House. Prices individual investors, who many muni funds follow
NEW YORK (AP) — So much another downturn. for all types of bonds fell can be prone to follow has already returned close
for that sleepy reputation. “That’s the nature of the on expectations that faster the tide. Prices for munis to 1.7 percent in the first
The municipal-bond mar- muni market, it overre- economic growth and in- eventually fell enough that quarter of the year. Don’t
ket used to be a reliably acts,” says James Dear- flation may be on the way. hedge funds and other big except that every quarter.
boring one, full of small cit- born, head of municipal Munis fell even more on institutional investors got in- Broad muni funds generally
ies, state governments and bond investments at Co- fears that some proposals terested and helped set a have yields around 2.5 or
others borrowing to build lumbia Threadneedle. would directly hit the mar- floor. 3 percent, and returns for
sewers, roads and hospi- Looking ahead, muni fund ket, chiefly a rewrite of the On top of that, it’s becom- 2017 will likely be close to
tals. But in the last decade, managers say they expect tax code. “Any time you ing clear that change there, managers say. The
the muni market has been the market to remain inter- talk tax reform, the muni could be slower to occur 10-year yield on the AP Mu-
all-too-interesting and esting. Volatility will likely market quivers,” McGuirk in Washington than initially nicipal Bond index is 2.54
whipped investors through remain as Washington con- says. expected, if it happens at percent.
several sell-offs. tinues to debate changes The income that munici- all. Republicans last month Volatility is also likely to re-
The latest struck in Novem- to the tax system. Returns, pal bonds pay can be ex- pulled their proposal to re- main. The Federal Reserve
ber, when the largest mu- meanwhile, will likely be empted from income tax- vamp the nation’s health is in the midst of raising rates
ni-bond fund had its worst lower than in past years, es. That’s why investors buy care system due to a lack off their record lows, and
month since the 2008 finan- but managers say they can a muni with a lower yield of support. higher rates knock down
cial crisis. It lost 3.4 percent still grind out modest gains. than a similarly rated cor- “Taxes are even more diffi- prices for all kinds of bonds.
on worries that the incom- “What the last two years porate bond, because the cult than health care,” says If the Fed can stick to its
ing White House and Con- have taught us is: Don’t return will be better after Peter Hayes, head of the promise to move slowly
gress would cut tax rates panic,” says Hugh McGuirk, taxes. Tax reform could put municipal bonds group at and modestly, bonds can
and pursue other moves head of municipal bonds the exemption in the cross- BlackRock. “The complex- continue to chug along.
that could weaken muni at T. Rowe Price. hairs. Even if it survived, ity of the tax code and dif- But if the economy and in-
bonds’ appeal. Since then, Few were taking that ad- muni bonds could be hurt if ference of opinion tells us flation pick up their pace,
though, muni funds have vice in November, after tax rates dropped and di- that it’s more likely to be the Fed would have to get
clawed back about half Republicans swept elec- minished the exemption’s later than sooner.” more aggressive.q