The complexity of the alternative minimum tax is a major reason why AMT municipals usually trade at yields at least 10 basis points higher than comparable non-AMT paper, according to Michael Shamosh, managing director and municipal bond strategist with Corby North Bridge Securities Inc.
"Most individual investors don't even know if they're subject to AMT," said Shamosh.
"That's always been the case, and lot of people just don't want to bother" with the potential tax hassles involved with owning private- activity bonds.
Shamosh said it was surprising that the spread between AMT and non-AMT bonds has widened lately - suggesting AMT bonds are less in demand - given the widespread concerns about tax reform.
"If everybody is worried about the flat tax, you would think AMT paper would be more popular," he said. "You're getting more yield - that puts you closer to the Treasury market."
Under a flat tax, an AMT bond would receive the same tax treatment as a regular municipal. Because AMT bonds yield more, "they should do better in a flat tax scenario," he said.
In Shamosh's opinion, AMT bonds are a good value regardless of what happens with tax reform.
For those investors not subject to AMT, private-activity bonds "give you a gift of 10 to 15 basis points," he said.
