Municipal securities held by U.S.-chartered depository institutions fell in the first quarter of 2018 by nearly $16 billion. Historically banks have been large buyers of tax exempt securities. However, new tax legislation passed late last year by Congress dropped bank tax rates to 21% from 35%, making tax-exempt bonds less profitable.
The reduced appeal of municipal and tax exempt debt has the potential to drive up
borrowing costs for tax exempt issuers. A widely followed municipal-bond index fell more in the first three months of the year than any first quarter of the past 15 years.
Some analysts expect property casualty companies, another traditional buyer of tax exempt securities, to reduce their holdings as well due to the change in their tax rates.
For a more detailed discussion of this change in the tax exempt securities environment see the following Bloomberg News article: