New Legislation Could Help Support Muni Bond ETFs

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.