Affirming Davis Would Be Long-Term Gain for Investors; Near-term Boon for Brokers?

Many in the muni bond industry seem to think that preservation of the status quo, i.e. the Supremes overturning Davis, would be in the best interest of the market. I can see where issuers might feel that way but it seems that upholding Davis could be a boon to bond brokers.

Assuming that states would likely exempt all bonds from taxation in order to preserve tax exemption for themselves, this would open up the investment options for buyers. Investors in high-tax states now are forced to buy in-state. As the attorney for the Davises, G. Eric Brunsted Jr., put it to Chief Justice Roberts: “One cardinal principle of investment is diversification. These discriminatory tax laws basically compel people to hold only the bonds within their particular State.”

If investors were no longer compelled to buy in-state only they would indeed be able to achieve much greater diversity in their portfolios. That development would be an opportunity for enterprising bond brokers to do some business helping their clients restructure portfolios that are, naturally, heavily concentrated in all single-state issues. The ability to buy bonds from pretty much any state might even attract more investment to the muni market. Wouldn’t that be a net positive for all parties?

Gavin Murphy

National Editor

The Bond Buyer

gavin.murphy-AT-sourcemedia-DOT-com