President Obama’s new American Jobs Act proposal changes the tax-exempt status of the income from municipal bonds, which is “something we haven’t seen really in memory,” said Ben Thompson, a portfolio manager who oversees $7 billion in tax-exempt bonds for Samson Capital.
“From an investor perspective, whether you’re paying a 7 percent tax or a 12 percent tax, [the] municipal bond market in today’s pricing levels remains relatively attractive,” Thompson told CNBC Tuesday.
But over time “we certainly expect this to result in higher municipal bond yields relative to Treasury yields,” he added.
“If Treasury yields were 4, 5, or 6 percent, the normal relationship of municipal bonds to Treasurys would dictate a high yield for munis because of that tax.”
“The way it works…is you’re allowed the maximum rate of 28 percent. So if you’re in the 35 percent tax bracket, you’ll pay 35 minus 28 or 7 percent tax, on your generic municipal bond,” explained Thompson.
“If the Bush tax cuts expire, that [maximum rate] goes to 39.6 percent and the tax on municipal income goes to 11.6 percent,” he went on to say.
From an investor's perspective, "municipal bonds will find the right yield level relative to other sectors, and remain a viable, high-quality attractive investment — albeit at cheaper rates," Thompson concluded. "But the municipal issuers will bear the brunt."