'Great Opportunities' Exist Within Muni Bonds: Portfolio Manager
Despite the concern and fear over credit conditions within the municipal bond market, great opportunities still exist because of the tax-equivalent yield investors can earn on a muni bond, according to the senior portfolio manager at Oppenheimer Funds, which has over $26 billion in assets under management.
"We're reminded of how great that tax exempt is about this time of year when we're completing our tax returns, it really is quite enormous," Dan Loughran told CNBC Friday.
"The muni yield curve is very steep—short rates low, long rates relatively high. So if you go out on the yield curve, say 30-years for an A-rated muni bond, you can earn 5.5 percent nominal yield," Loughran said.
"Just because Fed funds are going higher ... that doesn't necessarily mean that long rates will go higher.
"The Fed tightening machine, from mid-2004 to mid-2006, we had 25 basis points increase in Fed funds, every meeting for two years. Over that period, long-term Treasury rates and long-term muni rates fell slightly," he explained.
Separately, after appearing on "The Strategy Session," Dan Loughran continued the conversation off-air about why one of his favorite sectors in the muni market is higher education.
"When most people think of the muni bond market they think of state and local governments issuing general obligation debt, but the colleges, the private non-profit institutions are actually great borrowers," Loughran said.
However, the ratings agencies benchmark them off the Harvard's and Yale's, which naturally get triple-A, he explained. "These are really great borrowers, but the ratings agency just notch them down."
In addition, Loughran went on to say one of his favorites is Fairleigh Dickinson University in New Jersey, which has a triple-B rating.
"They have a really strong balance sheet and for the tax-free bonds they're actually secured by physical assets on the campus of FDU ... those bonds by the way pay yield of about 6.25 tax free. So for a New Jersey resident your taxable equivalent yield is north of 10 percent." he said.
Other sectors within muni's that Loughran likes are general obligation bonds on what some would perceive as weaker names, like the state of California and Illinois.
"Those names have gotten beaten down by bad news in the headlines but I'm very confident that those states, which back those bonds by their full faith in tax and power, are going to pay back," added Loughran.
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