Priscilla Hancock, Fixed Income Strategist at JP Morgan Asset Management, thinks municipal bonds are getting a bad reputation mainly because of a couple of trouble borrowers, namely Detroit and Puerto Rico.
"I think the concerns over Detroit and Puerto Rico are somewhat overblown; Detroit is an anomaly," says Hancock. "[Detroit's] situation is completely different. Their economy is quite weak. They have a declining population. They have very low levels of income and very high levels of debt. Puerto Rico has many of those same situations but, once again, it is also an anomaly."
Hancock says most major municipalities are not in the same fiscal or economic trouble as Detroit or Puerto Rico. She sees the relative spread between yields on municipal bonds versus yields on other types of bonds as a reason for investors to consider them.
"The municipal market is attractive relative to other fixed income securities today and we can see that when we look at what we call the municipal versus Treasury ratio," says Hancock. "You take a triple-A [rated] municipal [bond] and you look at the yield versus a US Treasury bond. Once you get past about ten years in maturity, that number is over 100%, which means you can move from a Treasury to a municipal bond and pick up absolute yield. Forget the tax exception, which is just another bonus on top of that."
In the Talking Numbers interview above, you can also see Hancock discuss Detroit's recent bankruptcy suit, what it means for other cities trying to borrow, and where she sees one unique buying opportunity right now.