Transcripts

Munis May Be The New Money Makers

PAUL KANGAS: Investors looking for new places to put cash in the current turbulent environment may want to consider municipal bonds. Many experts say munis offer great value as they now yield more than Treasury bonds. But as Erika Miller reports, that new opportunity is not without new risks.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's extremely rare for municipal bonds to have higher yields than Treasuries. We are living in one of those times. For example, AAA muni bonds with 10-year maturities currently yield 4.85 percent. In contrast, 10-year Treasuries are yielding 3.85 percent. Wachovia Securities fixed income expert Bill Hornbarger says the value is compelling.

BILL HORNBARGER, CHIEF FIXED INCOME STRATEGIST, WACHOVIA SECURITES: It's probably the single most attractive segment of the debt market for the individual investor who pays taxes on their interest income.

MILLER: State and local governments issue muni bonds to pay for construction of schools, stadiums, roads and bridges. Investors in high income states like New York buy them because the interest income is exempt from some taxes. They also buy munis because they're safe. But experts say investors need to understand why muni bond yields are now higher than Treasuries. First, as the financial crisis deepens, demands for Treasuries have increased so the government can offer lower yields on that ultra safe debt. In addition, muni bond insurance is now tougher to get which means muni bond investors can demand higher yields from issuers when they detect greater risk. And finally, the supply of munis has recently surged while demand has slipped as many broker dealers have exited the playing field. Still Van Eck muni strategist Jim Colby says even in an economic downturn, the default rate is low.

JAMES COLBY, SR. MUNICIPAL STRATEGIST, VAN ECK GLOBAL: In a recession you lose a little bit of credit quality, but in terms of bonds defaulting, in terms of the safety of the investment itself, there is no other asset class out there other than Treasuries where you can, you can really put your full faith in, in the asset.

MILLER: And despite strains in the muni market from states like California that have had trouble with short-term financings, most longer term offerings are considered very safe. Nevertheless, expert advise sticking to munis with high credit quality.

HORNBARGER: You want to stay with the very large names, state names, large city and county GOs (ph), essential purpose type of bonds, (INAUDIBLE) bonds, things like that from larger issuers. You're going to give up a little bit of yield, but I think you are going to pick up a lot of liquidity and safety.

MILLER: Frozen credit markets have made it difficult to sell munis, but for investors looking to buy them, experts say opportunities are ample and attractive, particularly if you have a long-term time horizon. Erika Miller, NIGHTLY BUSINESS REPORT, New York.