U.S. municipal bonds had a nice run last year, as the massive municipal defaults predicted by experts such as Meredith Whitney didn’t come to fruition.
And Pimco bond fund manager extraordinaire Bill Gross sees a good chance for the rally to continue. The Barclays Capital Municipal Bond Index gained 10.7 percent in 2011.
For a long time, worries about the financial woes of states and cities put pressure on muni bonds.
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“This has been a deserted asset class,” Gross, manager of Pimco Total Return Fund, the world’s largest mutual fund, tells The New York Times.
(Pimco file photo)
“People read about Alabama, Illinois, and Harrisburg, Pa., and they’re disenchanted. Things aren’t rosy, but that doesn’t mean most municipal issuers are going to default. There are a lot of A- and AA-rated municipals.”
Gross notes that A-rated munis generally yield about 4 percent to 5 percent tax free. That’s quite attractive compared to the 1.87 percent taxable yield on 10-year Treasurys.
And closed-end muni funds using leverage yield about 7 percent. Investors should beware that munis can be “volatile,” but they’re also “undervalued,” Gross says.
To be sure, not everyone is bullish on munis. Many experts expect the trend of municipal credit downgrades to continue, hurting muni bonds.
Whitney and others who forecast huge muni defaults "just had the wrong ‘D’ word," Dan Genter, chief investment officer at RNC Genter Capital Management, tells The Wall Street Journal.
“People need to be focused on downgrades, not defaults."
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