Municipal bonds are a better buy than other fixed-income investments, says Scott Minerd, chief investment officer at Guggenheim Partners.
"They are so cheap relative to every other investment grade security out there," Minerd told CNBC at the Milken Institute "State of the State" conference in Beverly Hills. He suggests they make up 20 percent of a fixed-income portfolio.
Guggenheim's analysis says the spread between Treasurys and AA-rated taxable muni bonds is 114 basis wider than average. AAA-rated tax exempt muni bond yields are 16 percent higher than normal versus Treasuries. Default rates in dollars amount to 0.26 percent of the entire municipal market.
While state governments continue to make cuts, raise taxes, and beg for federal money, Minerd says the worst is over.
Thirty states reported revenue growth in the second quarter, Minerd said, and he thinks even California is starting to recover. Since so much of the Golden State's tax revenue is tied to capital gains, a rallying stock market translates to better days ahead.
Here is Minerd explaining why the supply-demand equation on muni bonds is favoring investors:
What specific bonds does Minerd like or dislike? Here he gives names:
Minerd also says Build America bonds in California "will probably clear the market at almost seven percent" when they come out later this year. This even as he sees California recovering.