Muni Bonds Could Face Competition Under Bush Plan

Dick Berry, who manages about $1.2 billion in municipal bond funds for AIM Funds, said he doubted investors would pull out of munis "primarily because common stocks yield so little, and it's hard to find many that even pay a dividend anymore." Depending on their maturity, municipal bonds tend to yield about twice as much as stocks, he said.

Regardless of the tax status of dividends, municipal bonds will still appeal to people seeking investments that are less volatile and risky than stocks, some money managers said.

"I don't think there is any advantage that is lost in a municipal bond offering if dividends become tax-free," said Marc Freedman, a financial planner in Peabody, Mass. Freedman, the president of Freedman Financial, said he is not advising his clients to change their investments until the fate of the President's proposal and its ultimate form are known.

Miller also noted that it is uncertain what changes will be made in the fiscal stimulus package unveiled by the President last week, if it is approved at all. In any case, people should not base their investment decisions solely on tax considerations, she said. Desired returns and risk tolerance are also part of the equation.

Similarly, the Vanguard Group, the second largest mutual fund complex, posted a notice on its website last week cautioning investors to resist changing their investment portfolios "based on the current proposals because any final legislation may be quite different."

Although potential tax law changes can roil municipal bonds, the market for these securities has largely ignored the Bush plan so far, observers said. The lack of a reaction, Kaufman said, shows "there's a good deal of skepticism about whether (the plan) will pass and what final shape it will take."