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Municipal Default Rates Still Low: Lebenthal

Thursday, 16 Aug 2012 | 1:15 PM ET

Despite concerns about ballooning public pension expenses, municipal defaults are still relatively low, Alexandra Lebenthal, Lebenthal & Company president and CEO, told CNBC’s “Squawk Box” on Thursday.

Responding to a report from the Federal Reservethat suggested municipal defaults are much higher than many realize, Lebenthal said“it’s still 4 percent only of defaults.”

“And those are unrated bonds, which are industrial development agency bonds, which are for the most part ... really corporate bonds that can issue as municipalities. They’re health care and housing issues.”

She said she doesn’t expect any major increase in default rates in municipal bonds over the next decade, even with public pension expenses rising. Cities and other municipalities are looking for creative ways to avert deeper fiscal problems, she said. (Related: U.S. Municipalities That Went Bankrupt).

“I still think what you’re seeing is very important, whether it’s this creative way municipals are working out their situation or whether it’s municipalities sitting down with the pensions and saying ‘we’ve got to do something,’” said Lebenthal, whose firm specializes in municipal bonds.

Taxing Times for Municipal Bonds
Alexandra Lebenthal, Lebenthal & Company president and CEO, explains how municipalities are figuring out creative ways to solve their fiscal issues.

She said Scranton, Pa., was a city that didn’t do anything to address its fiscal situation and now has been shut out of the market.

When evaluating municipal bonds, an investor should “look at where municipals are trading as a percentage of Treasurys,” she said. “If you can get more than 100 percent — and you can — then the municipal bond is a buy even if you are an investor in a zero tax bracket.” (Related: Muni Rates Examined for Signs of Rigging).

“If you want to go out 30 years, which a lot of people don’t want to do because rates have to go up at some point, you can get close to 5 percent from a general obligation bond,” she added.