Talking Numbers

Forget Detroit, why munis look good

Forget Detroit, why munis look good

It was a big day for bankrupt Detroit and for investors in the $3.7 trillion municipal bond market.

The Motor City and its bond insurers reached an agreement Wednesday to reduce bondholder losses on $388 million in bonds. Should the deal get approved by a bankruptcy judge, the city would pay 74 cents for every dollar of debt, or about $287.5 million.

The big question now is what this mean for the vast majority of investors who don't invest in munis.

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CNBC contributor Gina Sanchez, founder of Chantico Global, says that while Detroit's bankruptcy may set a precedent with significant implications for the muni bond market, it won't have a domino effect that could harm other muni bond issues.

"This is a very, very low default rate story," Sanchez said. "[Detroit is] not going to take down the entire municipal bond industry."

Sanchez sees potential strength in the muni bond market due to a decrease in bond issuances. According to the Securities Industry and Financial Markets Association, $331.6 billion in municipal bonds were issued in 2013, a 12.5 percent drop from 2012 and the second-lowest amount in a full decade. And, during the first quarter of 2014, $62.6 billion in munis were issued, compared with $84.3 billion over the same time last year.

Additionally, municipal bonds dividend yields are relatively enticing, according to Sanchez. The iShares National AMT-Free Muni Bond ETF, the MUB, has a yield north of 3 percent.

"That's actually pretty darn good today," she said. "I think that's going to continue to make it attractive."

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Steven Pytlar, chief equity strategist at Prime Executions, sees the potential for the MUB to move higher based on the ETF's technicals. Pytlar's charts show the MUB making a double bottom nearly the $101 price level last year with rising interest rates. It subsequently made higher highs, breaking through the $106 level of resistance and consolidating in early 2014 between the $106 and $107.15 price level.

"When we see something move over a resistance and then consolidate," said Pytlar, "that's usually a good indication there's lots of interest in owning it above that old level where they used to be selling it. So, it's worth more today. It does look attractive, it does look like accumulation is ongoing, and we could expect it to move higher."

"It would look like the dips are buying opportunities right now," Pytlar said.

To see the full discussion on the MUB, with Sanchez on the fundamentals and Pytlar on the technicals, watch the video above.

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