PIMCO's El-Erian Says Municipal Bonds Are More Attractive Now That The Election Is Over And Investor Focus Returns To The Fiscal Cliff

The election results also give Fed chair Ben Bernanke more leeway to implement his unusual activism. He is much more likely to stay on and his stimulus actions given more time to work.
The prospect of tax rates spiking is making municipal yields more attractive. Since they are exempt from state and federal taxes, they are one of the few remaining options for investors to shelter income.
The Fed will continue to be investors’ best friend, El-Erian notes. He thinks the fiscal cliff will be avoided by a small bargain, not a grand one. For example, instead of allowing the expiration to cut 4% of gross domestic product, perhaps a contraction of no more than 1.5% will be targeted.
He thinks the greatest likelihood is that the fiscal cliff will be avoided in some fashion since more than 98% of households earning more than $50,000 would be affected by the tax hikes. The goal is to lessen the effect and to do so in a more orderly fashion than just allowing the current
laws to expire.
Since so many households will be affected, the quality of the muni market may also strengthen as municipalities benefit as bond issues enjoy higher demand. Sales at higher prices will add much-needed funds to municipal coffers.



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