We already own quite a bit of preferred shares issued by Annaly Capital Management (NLY), but I'm re...
Tailwinds for the Muni Market?
07/11/2012 11:15 am EST
Neil George, who has been painting a more positive picture for the municipal market over the past year, shares the reasons why he thinks they still have attractive potential.
We're here with Neil George talking about the municipal bond market and what we can expect for the future.
Gregg, thanks very much for having me. You know, the municipal bond market has always obviously been one of the more boring parts of the market. But even more recently, there were concerns that the so-called boring part of the market—you know the pensioner's haven—was really becoming more of a minefield.
We saw rubble from the state-level municipalities running at potential bankruptcy, arguing maybe Chapter 9. We had the Harrisburg incinerator debacle. We had the Jefferson County debacle down in Alabama. Therefore, we had sort of a general tainting.
We also had hysterics coming from certain pundits that wanted to make a name for themselves. Calling for a trillion dollars worth of defaults. The reality is much different, Gregg, and as a result the muni market is actually doing quite well.
I think the key thing to look at is that right now, people are looking for income, looking at parking cash. The Treasury market, which is doing quite well, is yielding so little, and has relatively limited ability for further growth. It's the muni market now that is attracting that money that typically has been parked in Treasuries.
And you've been bullish on munis for quite a long time when everybody else was running around with their hair on fire saying sell, sell, sell. You've done pretty well with these.
Yes, Gregg. In fact, in past interviews on MoneyShow.com we actually have discussed the muni market. We've talked about the idea that in many cases, we're actually seeing increasing tax revenues, showing that the recovery that's been occurring in the US market is translating into rising revenues for a lot of municipalities.
We've also seen a lot of spending reforms happening. Even in Nevada in Clark County, we've seen that the county executives and county council have been making some very serious cutbacks in educational funding despite some of the opposition. So the end result is that we're getting rising revenues, we're getting controlled spending, and balance sheets and cash flow statements for states and municipalities are getting much better.
There's always been a whole collection of high-quality issuers. Adding to this, we also have some new regulatory measures by the MSRB, which oversees both issuance and trading in munis. We're getting rid of some of the past shenanigans.
The Memphis bond daddies are really on notice right now, and as a result we're getting cleaner bonds. We're getting more efficient bonds that are coming to the marketplace, and they're finding an eager audience.
Wow, that's exciting. Are there any plays that you like out there?
Yes there are. As far as looking at some of the issuers within your local states, focus primarily on general obligation. Stay away from project finance. Stay away from revenue-specific issuers. That's where you get the safety part of the equation. Also, avoid insured. Go for just pure, clean, simple munis.
Now, beyond that from a national standpoint, there are three closed-end funds that I've talked with you about in the past that I've been recommending at past MoneyShow conferences. The three in particular are the Alliance Bernstein National Municipal Income Fund (AFB), which trades on the New York Stock Exchange. The second one is run by BlackRock, the Municipal Income Trust II (BLE). The last one is Nuveen Quality (NQU).
All of these are paying current dividend yields of about 6.1%. They trade a bit above or below their current book value, so they're good buys right now. If you look at the performance, we've seen returns in the 20% range for each one of these. And if you go back and look for the past decade, you'll see double-digit returns consistently year after year after year for the past decade.
It's not something that's just happened now. It's something that has been happening very consistently, and that's why I feel very emphatic for those seeking safety income, this is a good area to look at right now.
Well, they're certainly not boring with those kind of returns. That's not what you expect from munis.
Well, the boring part might be that you're not going to see much price volatility. If you'd like to have stability in your portfolio and get a lot of income and have the security of knowing that you can both eat well and sleep well, I think these three muni funds as well as some specific GOs in some of the viewers' individual states might be the exact prescription.
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