The Senate is expected to clear bipartisan legislation that could help make it easier for U.S. banks to buy state and local bonds, potentially bolstering demand for municipal debt and supporting munis-related exchange traded funds.
The provision, which is backed by large U.S. banks, would ease new rules aimed at ensuring banks held enough cash or high quality liquid alternatives to withstand a potential financial market meltdown, reports Andrew Ackerman for the Wall Street Journal.
“As Congress has sought to make a common sense change to the way capital rules treat custody assets, we have asked that they apply that change to all custody banks to maintain a level playing field in this important business,” a Citi spokesman said.
Under current federal banking rules approved in 2014, those “high quality liquid assets” included cash, Treasury bonds and corporate debt, leaving municipal debt out of the loop. Banks have historically held municipal bonds because of the debt securities’ safety and tax advantages.
The Senate voted Tuesday 67 to 32 to formally begin debate on the proposed bill, breaking the 60 votes needed and revealing that the measure has enough support from Democrats to pass.
If the bill is successfully implemented, banks could begin holding high-quality, investment-grade municipal bonds as part of their cash requirements or as part of the securities that are easily salable, potentially increasing demand for muni debt.
Meanwhile, the increased demand could help support the munis market. Bond ETF investors can also look to quality muni bond options like iShares National AMT-Free Muni Bond ETF (NYSEArca:MUB), SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEArca:TFI) and VanEck Vectors AMT-Free Intermediate Municipal Index ETF (NYSEArca: ITM) to diversify their fixed-income portfolios with a tax-exempt offering that produce relatively attractive yields for investment-grade debt exposure.