Now that the fiscal cliff appears to be behind us, municipal bonds and related exchange traded funds emerged from Congressional scrutiny unscathed and the debt securities could even begin to gain value again, some Wall Street analysts say.
In a recent note, Wells Fargo analysts said that there is “increased value for the tax exemption given the higher taxes on the wealthy and the new investment income tax, at least for now,” Reuters reports. [Muni Bond ETFs: Year in Review and 2013 Outlook]
However, it does not mean that muni bonds will be perfectly immune to tax scrutiny down the line as it is “still conceivable” for Congress to revisit the tax-exempt status. [Muni Bond ETFs Skid on Risk of Tax Increase]
Still, any bill that calls for limits to municipal bond’s tax status would have to jump through a lot of hoops. Will Hepburn for Benzinga notes that if the federal government passed a law calling for taxation on the muni bond interest, it would test its constitutional muster in the Supreme Court. Moreover, this move would allow local governments to consider taxing federal properties, such as military bases, post offices and national forests, which do not pay taxes.
As interest over municipal bonds grow, the Securities and Exchange Commission issued a warning “to help educate investors about assessing credit risks they face when purchasing municipal bonds.”
Investors are advised to “undertake their own independent review of the municipal bonds’ risk” and to “look beyond the short-hand label given to a municipal bond, such as ‘general obligation bond’ or ‘revenue bond,’ or the bond’s credit rating” when looking for a muni security.