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Learn more about municipal bonds in our education section here.
One of the main provisions is in Section 403, which would reclassify investment-grade municipal bonds as a High-Quality Liquid Asset (HQLA). Large banks with assets of over $250 billion are required to meet a Liquidity Coverage Ratio (LCR) to ensure each bank has enough liquid assets in the event of financial stress.
As part of this liquidity measure, banks are required to have a certain amount in three levels of assets. Level 1 assets are Federal Reserve bank balances and foreign resources that can be withdrawn quickly, securities issued or guaranteed by specific sovereign entities and U.S. government–issued or guaranteed securities like Treasuries. Level 2A assets include securities issued by specific multilateral development banks or sovereign entities and securities issued by U.S. government-sponsored enterprises. Level 2B assets include publicly traded common stock and investment-grade corporate debt securities issued by non-financial sector corporations.
With the new bill passing, investment-grade municipal bond debt has been added to Level 2B assets, so banks will have an incentive to buy municipal bonds.
However, this may have been premature with the new bill being passed; municipal bonds are now attractive for an entirely different reason. These banks, which are all over the $250 billion asset threshold, are likely to increase their stakes in municipal bonds again.
With the demand for municipal bonds increasing overnight, these local governments can issue their bonds at a much lower rate than before. Overall, this helps the country’s total infrastructure plan, which was one of the main issues that President Trump was looking to improve upon.
With the bond market already fairly thin to begin with, investors looking to reallocate to investment-grade municipal bonds should do it sooner, rather than later. For investors that already own investment-grade municipal bonds or mutual bond funds, expect the bond prices to increase.
Use our Municipal Bonds Screener to find municipal bonds for your specific investment needs.
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