Invest in Muni Bonds Carefully: Vanguard Manager

risk_definition.jpg

Investing in municipal bonds, or munis, has plusses and minuses, a Vanguard manager told CNBC Wednesday, but overall he recommends putting money in select ones.

“As an asset class within fixed income, they make a lot of sense,” said Bob Auwaerter, who joined Vanguard in 1981 and has managed investment portfolios since 1978.

“On the positive side, the technicals, you have a lot of demand, investors are trying to move out of money-market funds."

That's because, due to the losses in the equities markets, investors collectively have been moving billions of dollars out of stocks since 2008, and putting some of that cash into bonds of all types. With regard to muni bonds specifically, the return year-to-date has been 7.5 percent, whereas the S&P 500 has declined by 2 percent.

Auwaerter said that the supply of taxable munis has fallen because governments have have opted instead to generate returns by socking money into taxable Build America Bonds(BABS).

The Muni Bond Bet
The Muni Bond Bet   

BABSare part of the American Recovery and Reinvestment Act of 2009, which were created to help states finance infrastructure projects and hire unemployed Americans.

On the downside, said Auwaerter, credit is deteriorating in munis. Cash-hungry governmentsare collecting less from state sales and income taxes, added Auwaerter, but, nonetheless, need funds to satisfy social-safety network obligations.

Auwaerter’s take on two state’s munis:

  • Pennsylvania—Yes

“From a credit perspective, it’s in good shape, although there’s some deficit,” said Auwaerter.

  • Illinois—Hold for now

“If you look at the governor’s race,” he said, “it seems like there aren’t any reasonable plans put in place to cut the deficit.”

To learn more about bond investing, specifically corporate bonds, watch the "Bond Bets" special segment, Thursday, August 19 on Street Signs, 2pm ET