Thursday, February 15, 2018
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer  Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
2/8/18	1.32	1.55	1.73	1.91	2.13	2.32	2.57	2.76	2.85	3.03	3.14
2/9/18	1.31	1.55	1.73	1.89	2.05	2.26	2.52	2.72	2.83	3.02	3.14
2/12/18	1.35	1.62	1.82	1.93	2.09	2.30	2.56	2.77	2.86	3.02	3.14
2/13/18	1.34	1.59	1.80	1.95	2.10	2.30	2.54	2.74	2.83	2.99	3.11
2/14/18	1.32	1.58	1.81	1.98	2.17	2.40	2.65	2.84	2.91	3.07	3.18

                                                                                      Source: U.S. Department of the Treasury, as of 2/14/18  

Taxable Equivalent Yields

Tax-free muni bond investors seek to maximize after-tax income.  This is often done by purchasing federal, state and local tax-free debt at nominal rates which are generally less than the nominal rates achieved by taxable bonds of similar terms (maturity/call, etc.).  However, when the net income after taxes have been considered, this comparison flip-flops as muni bonds tend to out-perform taxable bonds.  This is due to the significant tax liability on earnings which investors owe a taxing authority for any taxable bond.  Thus, it is the net after-tax yield that tips the scales, not pre-tax yield.  And the greater the total tax burden, the greater the value of a tax-free bond.

So it follows that tax-free muni bond investors are stopping to recalibrate in the wake of President Trump’s new tax law, which reduces marginal tax brackets, and thus, reduces taxable equivalent yields.   These same investors are also paying attention to the White House’s plans for infrastructure projects.   Though many new infrastructure projects are likely to be financed by municipal securities (a good thing), investors are still assessing the impact tax reform has on the comparative advantage of owning tax-free bonds.  How the later topic is settled has the potential to unsettle the usually staid and stoic municipal bond market.

What to do?  A couple points to measure:

1. Analyze your tax-free bond portfolio vs. a 21% (C Corp) and 29.6% (S Corp) marginal tax bracket to ascertain the resulting taxable equivalent yields.  For the C Corps and any S Corp less than 36 months into the S election, you’ll need your TEFRA penalty handy as well.  Are you better served to own taxable bonds?  Study that relationship.

2. If a shift to taxable bonds is advised, consider the timing and method of liquidating your tax-free municipal bond portfolio.  How to establish sale parameters and realistic valuation are two of many points to measure.

Please call your CCB Capital Markets rep for a thorough discussion.

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

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