The government recently has simplified rules governing foreign investments in local bonds to attract capital flows and narrow its current-account deficit.
They include the tax exclusion for employer-sponsored health insurance, the mortgage interest deduction, tax-free interest on state and local bonds, and dozens of others.
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In the experiment capital gains and dividends are taxed as ordinary income and there is no exclusion for state and local bonds issued after December 31, 2012.
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It concerns whether interest paid by a state on the amount it owed for taking property was excludible under Section 103 (Interest on State and Local Bonds).
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Interest earned on state and local bonds that is exempt from income tax under Section 103 is excluded from the definition of net investment income for purposes of Section 1411.
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One idea being bandied about entails replacing the tax exclusion for interest on state and local bonds with a direct subsidy to the issuer of 15% for the interest paid on those bonds.
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The comments have local politicians looking to state legislators for some sort of guarantee program, says Buck Landry, a managing director at Morgan Keegan, a Memphis investment bank that dominates the market for underwriting tax-exempt municipal and local bonds in the region.
Decisions like this will benefit all categories of emerging bonds, but particularly local currency bonds which are positioned to gain value on the back of currency appreciation over the long run.
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If investors buy the Brazilian dollar bonds, yields are around 4% compared to 12.5% for local currency bonds.
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Municipal and local municipal bonds will see historic defaults due to high levels of leverage.
That region is a much better investment bet for both local currency bonds and equities.
Investors are better off borrowing from Japanese banks and buying Australian local currency bonds.
In October 2010, Mantega raised a financial transactions tax on local currency bonds twice in one week.
That was the hole, much of it caused by some poor performing local currency bonds in South Africa.
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Morgan GBI-EMG Core Index, which in turn tracks the performance of local currency bonds issued by emerging market governments.
The fund also holds China local currency bonds as well, but those are not easily accessible to the mainstream public.
In the 2008 financial crisis, foreign investors cut their position in Mexico local currency bonds by 20%, measured in peso terms.
Stable currencies continue to make local currency bonds a top pick for fixed income fund managers looking for yield, volume, and liquidity.
Local currency bonds are the investment of choice of global fixed income mutual fund managers and Brazil is usually top on the list.
For example, South Africa's Standard Bank, which operates in 18 African countries, packages local government bonds into instruments it sells to foreign investors.
Countries like Brazil could conceivably raise taxes on foreign investors buying local currency bonds to ward off dollar flow and sharp appreciation of the Brazilian real.
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Rising inflation means rising interest rates, and that means more fixed income investors pouring money into Brazilian local government bonds that pay well over 11% annually.
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Zervos said she had a tough start to the year because of a big sell off in local currency bonds she holds in South Africa, in particular.
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Many investors, especially in low interest rate countries like Japan, can borrow money at low cost and invest it in Brazilian local currency bonds that pay much higher yields for both short and long-dated bonds.
While there are moments when the dollar has strengthened, causing investor to lose value on their foreign local currency bonds, the overall trend remains in their favor, with the biggest risks to the upside, Barclays has said in similar reports recently.
Barclays said on July 5 that it attributed this allocation decision to the heightened uncertainty in the euro area and the potential for volatility in currency markets, limiting the upside potential in local currency bonds as they lose value compared to the dollar.
Mr. Hoguet recommends holding about 2% of an overall bond allocation in emerging-market hard-currency bonds, and about 8% in emerging-market local-currency bonds.
Local currency government bonds have traded recently below 10%, where double digit yield is much more common.
Money is also starting to be raised by local authorities selling bonds.
An investor in local-currency bonds does assume currency risk, he says.
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