Bond Market Commentary

A Fresh Look at the Alternative Minimum Tax (AMT)

By Doug Drabik
January 22, 2019

The Alternative Minimum Tax (AMT) dates back to 1969. It was established to prevent the wealthiest individuals from using deductions and credits to avoid paying any federal income taxes. As time progressed, AMT was affecting mostly non-exceedingly wealthy taxpayers. In December of 2017, the Tax Cuts and Jobs Act was signed, keeping AMT but raising the exemption and phase out levels. The result is estimated to alter the 5 million taxpayers affected by AMT down to approximately 200,000 taxpayers.

Since nearly 96% of the taxpayers that were affected will no longer be AMT affected, it might be beneficial to take notice that in general, AMT municipal bonds are trading with significantly wider spreads than comparative non-AMT bonds. Thus, investors can pick up yield on similar and sometimes the exact same obligors that issue both AMT and non-AMT bonds. Of course investors should consult with their tax accountants and/or attorneys to verify that they will no longer be subject to AMT.

Chip Peebles, a municipal trader, points to an example: Pennsylvania State Housing Finance Agency (Aa2/AA+ rated) issued both AMT and non-AMT bonds. The AMT issue: Maturity 10/01/2032, 3.65% coupon, spread +115bp (to AAA muni scale). The non-AMT issue: Maturity 10/01/2034, coupon 3.50%, spread +86bp (to AAA muni scale). The credits are identical but as noted, the AMT bonds are shorter in maturity yet spread significantly wider, thus providing a much better potential yield. Where available, the typically bypassed AMT issues in the secondary market can be an additional source of alternatives. For a vast majority of taxpayers, these bonds may now present an opportunity to boost yield.

Non-AMT Series


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AMT Series (partial)


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Source: Bloomberg LP


To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.