An Event that Has Income Investors “Petrified”

“This could be absolutely huge!” says Jim Nelson of our income desk.

Seldom does Jim indulge in exclamation points, so we sat up and took notice when he tipped us off to a “fiscal cliff” issue you won’t hear about from the financial media.

First, the essential background: Remember the Simpson-Bowles commission, the “blue-ribbon panel” appointed by President Obama to solve the debt-and-deficit issue once and for all?

Well, they didn’t, because they could never come to terms… but now White House and Congressional negotiators are dusting off Simpson-Bowles as they try to tiptoe back from the edge come Dec. 31.

Amid a laundry list of proposals to change the tax code, Jim has helpfully highlighted one for you…

“That single line has one of the largest areas of fixed-income investors petrified,” says Jim.

“Matt Posner, legislative coordinator at Municipal Market Advisors, had this to say: ‘In the Senate, even before this election, there was bipartisan talk already that this 28% idea had legs.’ The 28% Posner is referring to is the maximum amount of muni bond interest an investor can deduct from taxable income under some more recent, more detailed proposals.

“Any proposal that would put the tax-exempt status of municipal and state bonds into question could have absolutely devastating effects. Even if, as the Simpson-Bowles report stated, only new issues fall into this tax status, we’ll still see billions of dollars in withdrawals.

“After current munis mature, there will be nowhere to roll those investments into if new ones are taxable — that whole allure of munis is their tax exemption. And with the run-up of bond prices across the board, those current muni investors will just take their gains and move on.

“That’s just one more nail in the fixed-income coffin,” says Jim… but it also opens the door to some advanced income solutions on his radar.

Cheers,
Dave Gonigam

The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.