September 1st, 2011
by John Lounsbury
Last fall and earlier this year ominous warnings about the potential for municipalities to default on their bonds put a scare in the mini bond market. These warnings came from such sources as financial analyst Meredith Whitney (Meredith Whitney Advisory Group) (on left) and economist Nouriel Roubini (economics professor at NYU) (on right). Roubini estimated muni defaults about $100 billion over the next five years, with investors risking losses around $35 billion. The projection was made at the end of March 2011. Follow up:
Follow up:Whitney famously predicted muni defaults leading to hundreds of billions of dollars in muni bond defaults when she appeared on a December, 2010 episode of 60 Minutes. Whitney’s episode can be watched as part of the following video.
These doom and gloom pronouncements actually came near the bottom for muni bond investments, as can be seen in the one-year chart for NYSE:MUB (iShares S&P National Municipal ETF). Whitney’s projection was made less than a month before the bottom and Roubini spoke out six weeks after.
Now that MUB is back within 1% of its all-time high in August of 2010, Morningstar muni-fund analyst Miriam Sjoblom is quoted in a Financial Planning Magazine article:
Well as it happens, Morningstar muni-fund analyst Miriam Sjoblom says that there may be only about $1 billion worth of defaults by public issuers in all of 2011, which would actually be an improvement over the amount of muni defaults recorded in 2010 and 2009.
Meanwhile, she said, while investors have been slowly tiptoeing back into municipal bonds, they’ve been staying in the shallow end of the pool, buying only short and intermediate-term muni-funds, but still shying away from long-term muni funds.
“Long-term bonds funds have remained unloved,” Sjoblom said.
And yet because of this, she said the yields offered by the long-term muni funds are significantly higher than the short- and medium-term fund yields – sometimes by a spread of as much as 200 basis points for the 30-year bonds.
Yahoo lists four long-term muni bond ETFs:
Investors can also look for bargains in individual municipal bonds and get maturities out to 30 years.
For those who want to be more conservative and place a stake in short-term munis, one attractive approach is to construct a ladder with ETFs with maturities spaced over the next six years. This can be done with the following iShares series:
· iShares 2012 S&P AMT-Free Muni Series (NYSE:MUAA)
· iShares 2013 S&P AMT-Free Muni Series (NYSE:MUAB)
· iShares 2014 S&P AMT-Free Muni Series (NYSE:MUAC)
· iShares 2015 S&P AMT-Free Muni Series (NYSE:MUAD)
· iShares 2016 S&P AMT-Free Muni Series (NYSE:MUAE)
· iShares 2017 S&P AMT-Free Muni Series (NYSE:MUAF)
So far, it looks like the best time to but municipal bonds would have been when the biggest negative projections were being made. However, others were also cautionary at that time as well. People like JP Morgan Chase (NYSE:JPM) CEO Jaimie Dimon spoke out in January.
Some were not part of the panic, however. Bill Gross of PIMCO said January 13:
“Ultimately, municipal bankruptcies will be at a lower level,” Gross said today on Bloomberg Television’s “InBusiness”program. “I don’t subscribe to the theory that there will be lots of them.”