Tags: Zweig | stand | pat | munis

WSJ’s Zweig: Now is the Time to Stand Pat on Your Muni Positions

By Dan Weil   |   Monday, 03 Dec 2012 08:44 AM

Be neither a buyer nor seller of municipal bonds at this point, says Wall Street Journal columnist Jason Zweig.

Munis still have lot going for them, but there are some tax risks looming, he writes.

The asset class has been on quite a roll over the past four years. The Barclays Capital Municipal Bond Index returned 10 percent in the year through Nov. 30, according to Morningstar.

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The strength has led some to worry that munis are overvalued. And then there is the tax concern. Muni experts say that as part of a deal to avoid the fiscal cliff, Congress might limit the tax exemption for muni dividend payments to 28 percent.

So even if ordinary income tax rates don’t change, investors in the top bracket — 35 percent — would have to pay a 7 percent tax on their muni interest.

But there is a good chance existing munis would stay tax-free, Jamie Pagliocco of Fidelity tells The Journal.

And many muni investors are in the 28 percent-or-lower tax brackets anyway. So hold your horses, Zweig says.

A bigger issue may be the financial health of state and local governments.

In Illinois, for example, the public pension crisis is so bad that it can no longer be fixed, according to the Commercial Club of Chicago, Reuters reports. The state faces an $83 billion unfunded pension liability.

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