Look Towards Munis For Value

For most investors, the boring and uninspiring municipal bond sector is hardly given any thought. However, over the last year, the sector has been shaken by analyst predictions of wide-spread defaults. Perhaps the most famous, was credit analyst Meredith Whitney's 60 Minutes appearance, in which she predicted “hundreds of billions of dollars” of municipal defaults. Meredith's bold prediction fueled a wave of panic selling in the $2.9 trillion market. However, it seems that those predictions are coming up empty. The U.S. municipal bond market recently completed their best quarter since 1999. The news continues to get better for muni investors. Default rates for the sector have plunged nearly 60% so far this year. Only 24 municipalities defaulted from January through June, totaling less than $750 million. This compares with the 144 defaults worth $4.89 billion in the first six months of 2009. These decreases in default rates have been caused by leaner state budgets. According to the National Association of State Budget Officers, states have cut their budgets by 14% since 2008 and headcounts for state employees are at their lowest levels since 1999. Despite the sectors rise over the last few months, municipal bonds still offer more value than treasuries. Term structures for most municipalities are actually better than that of the federal governments. With the potential for higher taxes down the road, the muni sector is offering incredible value to investors. Default risk, although decreasing, is still there. For investors, a wide approach is best. Both the iShares S&P National AMT-Free Muni Bond MUB and SPDR Nuveen Barclays Capital Muni Bond TFI are the two largest funds in the sector and can be used as broad plays. For those looking for more yield, the junk muni focused, Market Vectors High-Yield Muni ETF HYD pays a 6.02% dividend.