Tax plan and corporate cash; municipal, preferred investments could gain. (Looking for Opportunities from Tax Reform, part 2)

Tax Plan and Corporate Cash

Municipal, Preferred Investments Could Gain

What impact will tax reform have on corporate investments?

The outlook is still murky, but some observers say that municipal bonds and some preferred stock funds could become more attractive places to park corporate cash.

Much will depend on how treasurers react to the expected loss of some deductions and tax preferences, such as the investment tax credit. If they look for other ways to shelter income, tax-exempt municipal bonds and tax-advantaged dividend income become candidates.

Lost deductions, however, will not affect all corporations. Moreover, many firms view municipal bonds and stock funds not as tax shelters but as alternatives to fully taxable short-term investments, such as Treasury bills and certificates of deposit. For cash managers at these firms, tax-advantaged investments may lose some of their appeal, at least initially, because of the lower marginal rates expected to be approved.

The net result, according to market experts, is that municipal bonds and some stock funds should at least hold their own. Some think, too, that those investment vehicles are well positioned for growth, which could provide opportunities for commercial banks and investment firms.

Now, instruments with maturities of three months to one year are earning 6% to 8%, with after-tax yields of just 3% to …