David Rosenberg says muni bond fears are ridiculously overblown.
Banking analyst Meredith Whitney has forecast serious municipal-bond defaults. “Sizable defaults” could occur in 50 to 100 cities and towns in 2011, Whitney told CBS, and that could amount to “hundreds of billions of dollars” in failed municipal debts.
But he doesn't agree. "Talk about fertile ground for a huge long-term buying opportunity," he says.
"The mass selling of munis, which represent the bedrock of the U.S. economy, is incredible — nine consecutive weeks of net redemptions totaling $16.5 billion,” Rosenberg writes in a note to investors.
"Even in California, only teachers come in front of bond holders," he wrote. "In other states, the debt holders are the first to get paid. It’s amazing how few people know that.”
Rosenberg suggests investors consider the yield protection munis offer now. Some long-term muni’s trading north of eight percent ― even higher than junk bonds, and long-term AAA-rated muni’s are now trading above five percent.
He also notes that this year’s estimated $350 billion in new bond issuance is less than the $429 billion issued last year.
“California off-the-run 30-year 6 percent bonds are now being quoted at a yield premium to dollar-denominated debts offered by the likes of Mexico and Columbia,” Rosenberg says.
Rosenberg advises investors seeking safety and income at a reasonable price should look for munis in regions with a manageable refinancing calendar, "A" or better credit rating, low levels of foreclosure rates and excess housing inventory, low unfunded pension obligations, and growing population bases … and concentrate on bonds backed by a non-cyclical revenue stream like water and power.
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