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From Tax Freedom To Tax-Free Opportunity - Friday, 04/20/2012

This week we arrived at Tax Freedom Day, the first day of the year in which the nation as a whole has theoretically earned enough income to fund its annual tax burden. I can only speculate that the slowdown of inflows into munis is possibly related to investors allocating their financial resources to tax obligations. I do not presume that they are using any muni facility for funding purposes but the drop in activity is not unexpected at this time of the year.

Nevertheless, the technicals continue to favor municipals. Plenty of supply has and, I believe, will continue to enter the market offering up familiar high-grade names in significant size to attract both institutional and individual demand. The ratios of AAA munis compared to Treasuries continue to be — with the 10-year spot the single exception on the curve — north of 100%. This means that tax-free bonds yield more than taxable Treasuries. I believe this will continue to draw attention to municipals once tax time has passed. In addition, default rates are trending lower than last year. One point of caution may be smaller, local issuers continuing to struggle with revenue deficiencies under a stagnant national economic revival.
 

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