Supreme Court Muni-Bond Delay Has Lawyers, Markets Puzzling

Bloomberg reports:

Municipal-bond investors have a new question to ponder amid the turmoil in the $2.6 trillion market: What is taking the U.S. Supreme Court so long?

The court heard arguments Nov. 5 on the special tax breaks that 42 states provide to municipal bonds issued within their borders. At the time, many analysts and lawyers predicted a quick decision that would allow in-state exemptions and overturn a Kentucky court ruling that declared them unconstitutional.

Five months later, the bond market is still waiting -- and in some quarters wondering whether the holdup signals something other than a clear-cut victory for existing tax rules.

``The length of time to me means that there could be more subtlety to the decision, or that the decision itself might not be as cut-and-dried as we had expected,'' said Matt Fabian, managing director at Municipal Market Advisors, a Concord, Massachusetts-based research firm.

A ruling against Kentucky would force states to eliminate their tax exemptions for interest on in-state bonds -- or extend those breaks to out-of-state bonds. States would face billions of dollars in refund claims, and almost 500 single-state bond funds would lose much of their appeal.

Such a ruling might ripple through an already troubled bond market. Municipal bonds lost 0.82 percent in total return on average last quarter, their worst start since 1996, according to a Merrill Lynch & Co. index.