Key to Muni Bonds: Ratings Not Headlines
While pre-tax yields at the long end of the muni curve now rival those of treasuries, Goldman’s Mossavar-Rahmani and Harris’ Ablin both advise muni investors to stick with shorter-term bonds.
“I wouldn't buy too far out because of the uncertainty and inflation pressures,” says Ablin. “I wouldn't buy any bond for more than 7-8 years.”
By contrast, Citi’s George Friedlander has been recommending 15-20 year maturities, which he thinks are an attractive value now.
“Because of the steepness of the yield curve, I’m not sure why one would want to stay short.”
Goldman’s Mossavar-Rahmani says one good reason is the outlook for the economy.
“While we like the yields, we don't like clients to go out that far, just because we think the economy is going to recover, “ she says.
“While those rates are attractive relative to short rates today, and relative to where we have been in the last three years, in five years time they won't look as attractive.”
Next Market Test: March Issuance
Since the new year, bond outflows have steadily diminished leaving the muni market relatively stable.
But analysts say issuance of new bonds has also been relatively light.
The market’s resilience could face a real test next month, when issuance is expected to pick up.
Harris’ Jack Ablin says more than the threat of default, muni investors now are more likely to get hurt by another buyer's strike if fear again sends investors to the sidelines.
"Whatever you buy, be prepared to hold it to maturity," Ablin cautions, "so that liquidity doesn't matter. "
Watch special coverage of the municipal bond crisis, "Muni Maze," all day Monday, February 14 on CNBC.