Munis May Be Target of Democrats and Republicans, Friedlander Says

Photograph by David Paul Morris/Bloomberg

Construction on the new Transbay Terminal in San Francisco.

Everybody’s got it in for muni bonds, said George Friedlander, senior municipal strategist at Citigroup Inc.

The $3.7 trillion municipal market may be a target of both Democrats and Republicans within the next year, Friedlander said at a Bond Buyer conference in New York Monday. Democrats approve of state and local financing for infrastructure, he said. However, the debt’s tax-free status is viewed as a “subsidy for the rich.”

Friedlander believes they might revisit a 28 percent cap on the tax exemption previously proposed by President Obama. Such a change could raise interest rates for municipal governments by 0.75 percentage point, and — if it’s applied to previously issued debt — erode the value of those bonds by at least $200 billion, he said.

The Republicans have less interest in curbing the tax exemption, Friedlander continued. Rather, their focus is cutting borrowing that they think supports profligate overspending.

“There are massive misperceptions about the muni market that exist on both sides of the aisle,” Friedlander said.

Such proposals were “inconceivable” a few years ago, he said. “Now they’re right around the corner. These things are not only possible, they’re likely.”

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