Monday, December 13, 2010

Obama-GOP tax deal and China's trade could suppress tax-free bond values for many investors

The extension of the tax cuts is probably going to push up interest rates, despite the Fed’s recent stimulus plan. “What the Federal Reserve Giveth, Obama Takes Away”, so goes a Reuters-Yahoo story today.  The story casts the game as “Fed v. Obama”, but maybe it’s Fed v. “Bubba Bill Clinton” who encouraged Obama go to along with the GOP on some tax cuts, even if Clinton was probably our most responsible president fiscally in recent times. (The first Senate vote on the "deal" may occur late Monday, according to media headlines.)

China may also put upward pressure on interest rates worldwide soon, according to many media stories.

The result is lower bond prices, which is not a good thing for many retirees who have invested heavily in less “volatile” bonds, especially tax-free municipal bonds, which may see lower demand due to high income tax cuts and also due to local government pension stresses and calls for stricter pension accounting. Just put all the eggs together and make an omelet.

Here’s a CNBC video yesterday that reminds us of 70s stagflation economics.

Update: Dec. 15

Check the front page Washington Post article by Neil Irwin, "Uptick in interest rates puts Fed on alert; Rise complicates efforts to kick-start economy with big bond purchage", link here. This comports with what a financial planner at SunTrust told me recently when explaining the recent dip in prices of tax-free municpal bonds.

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