The value of the $3.7 trillion municipal-bond market may drop by $200 billion, or about 5 percent, under President Barack Obama’s plan to limit income-tax deductions to 28 percent, according to Citigroup Inc.

To make up for reducing the amount of investment earnings that can be deducted from federal income taxes, investors will demand that tax-exempt yields rise by at least 0.6 percentage point, George Friedlander, senior muni strategist at New York- based Citigroup, wrote in a report this week. Bond prices move in the opposite direction of yields.

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