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All Muni Bonds are Not Created Equal

Tuesday, 4 Aug 2009 | 10:34 AM ET

The recent stock market rally has not deterred investors from pouring millions into municipal bond funds. Weekly inflows have topped $900 million over the past few weeks according to AMG Data Services.

But which muni funds are best as the economy struggles?

Konstantine “Dino” Mallas, portfolio manager of the T. Rowe Price Summit Municipal Income fund which is up 11.87% year to date, says muni bonds' tax exemption feature may be more sought after in the future as massive federal spending may prompt a tax hike.

Protection for Muni Bond Investors
The Financial Industry Regulatory Authority (FINRA) is launching a comprehensive initiative to protect municipal bond investors. Richard Ketchum, chairman and CEO of FINRA, discusses this initiative with CNBC.

Mallas avoids general obligation bonds and focuses on revenue bonds, which he says are less prone to credit risk. He prefers debt issued for essential activities that will do well during an economic downturn such as water, sewer, electric and utilities.

“People will still need lights and water,” he says.

He says investors should look into funds that have diverse holdings and are not making big bets. Mallas says investors have been burned by not knowing what they were buying. “If it looks too good to be true, maybe it is,” he says.

Janet Grangaard, senior portfolio manager of the Thrivent Municipal Bond (TMBIX) which is up 8.12% this year, says credit spreads are also attractive.

“Credit spreads are not as wide as in fourth quarter 2008, but are still relatively wide over longer time frame,” she says, adding a yield curve this steep is very rare.

Grangaard invests in electric, sewer, elementary, secondary and higher education, and non-profit hospitals. She’s avoiding student loans and housing bonds right now.

She has taken recent positions in the A-rated portion of the muni bond market where credit spreads are attractive “if the economy disappoints, [and] still have margin of error security."

Grangaard says investors should maintain a broad diversity across states. For example, recent problems in California bonds have been offset by investments in Texas bonds.

Disclosure:

No immediate information was available for Mallas or Grangaard or their firms.

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