Navigating the Muni Bond Market

10/07/2011 3:00 pm EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

There are fewer opportunities in municipal bonds, which means investors need to closely examine the bonds before they buy, says Marilyn Cohen of Bond Smart Investor in this exclusive interview with MoneyShow.com.

Marilyn, for municipal bonds, is there any value left out there?

Barely, just barely. Yields are at generational lows, lower than when we had all those Wall Street Journal articles last August, and the issuance is down 40% from last year; so there are 40% fewer new issues.

Demand is pretty big, and the yields are really pretty limbo low. So 65% of my business is in munis, but they are a hard sub-asset class to love because of the yields.

How about the fact that state and local governments are going to be getting less money from the Federal government because of less spending? Does that mean that they are going to have to try and raise money through municipals?

Well, it means that the munis that are issued now by the issuers are going to have more problems, because with that lack of trickle down from the Federal government, states are going to have less money to trickle down to the schools, to the cities, to the counties.

It is going to be more of an austerity program, no question about it. So those issuers that are struggling now, I think the struggles are going to become far, far bigger over the next 12 to 18 months.

Does that mean we are going to see massive amounts of defaults?

I don’t think hundreds of billions of dollars, I don’t agree with that, but it means you better know what you own, and you better be able to connect the dots as to:

  • how is the interest is going to be paid
  • what are the sources of the revenues
  • how am I going to get paid
  • and is there any safety net for me in between

That [last one] is called interest coverage. So in our credit matrix, we like to have issuers in which there is 1.25 times coverage minimum. That they have got money in their reserve fund, and they are not some kind of cockamamie convention center, hockey rink, or stadium.

So we are looking at general obligations, that sort of thing.  

We are. We are looking at general obligations. I like revenue bonds too, because you have a lot of specific revenue bonds that don’t have the unfunded pension liability problems.

They don’t have to worry about whether the mothership is going to trickle down some of its mother’s milk to them—they do it on their own. It could be parking structures; it could be water and sewer; it could be airport revenue bonds. So I think a diversified portfolio, both as far as sectors and geographic diversification, is really important now.

Can we talk about the geographic diversification? It looks like all the states are having some problems. Is there any area or region that looks more attractive?

Well, there are some states that are more attractive as far as quality is concerned, but you know you are going to ask me to name those. The truth of the matter is that means their yields are even lower.

So I think that you can have a certain portion of your issues issued by your state and/or municipalities in your states. For the last 2 1/2 years, I have been spreading all of my geographic positions out, because I don’t know what I don’t know.

You don’t buy munis, you don’t invest in munis for a total return. You do it for safety and security. Why would I want anybody to have all Illinois or all California?

No, I am paying for conservative management, and that would not be conservative by any stretch of the imagination.

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