Skip to main content

Merrill Lynch sees opportunities in Muni's

As the credit crunch has unfolded, we have seen municipal bonds fall in value as bond insurers have weakened and concern mounts that mortgage problems will impact the ability of municipalities to collect tax assessment revenues.

Merrill believes this is somewhat overdone and that the entire municipal bond sector has been tarnished though only isolated instances of problems are likely to occur. Without more precise risk assessment to identify those municipalities that will or will not suffer, investors will be throwing out the baby with the bath water. This implies that national muni closed-end bond funds are selling at deeper than average discounts to their net asset values.

The chart below shows the yield ratio between AAA-rated municipal bonds and 10-year Treasuries. The ratio is currently at a multi-year high. Merrill expects the 10-year Treasury yield to fall to 3.5% by mid-2008, supporting an expectation that the relative yield of munis will remain at a higher than average level.


Yield ratio: Munis vs. Treasuries, click for larger image.
Other than buying bonds outright, the traditional way to invest in munis is via mutual funds or closed-end funds. There are many choices in these vehicles and all the financial portal websites provide extensive information.

Less well know is the fact that there are a few ETFs available in this sector.

VanEck offers the MarketVectors Intermediate Municipal Index ETF (ITM). It is a national muni fund based on the Lehman Brothers AMT-Free Intermediate Continuous Municipal Index. This index is a market value weighted index designed to replicate the price movements of medium-duration bonds (6-17 year maturity). Other characteristics of the index: bonds are rated investment grade, are AMT-Free, have an outstanding par value of at least $7 million, are issued as part of a transaction of at least $75 million and are fixed rate. This ETF was only launched this month so there is little history. Volume is very light and yield has not been provided. You can read more about it here.

BlackRock Municipal Bond Trust (BBK) has been around for a while but it is allowed to invest in lower quality bonds, less than AAA-rated. A brief description can be found here.

PowerShares is in the process of rolling out a selection of new ETFs based on two muni indexes created by Merrill Lynch. One is an insured portfolio, the other isn't. Otherwise, both will track tax-exempt long-term debt publicly issued by U.S. municipalities in the U.S. domestic market, will exclude single- and multi-family housing bonds, tobacco bonds and all securities subject to AMT (Alternative Minimum Tax). Read more about them here.

If you're looking for yield with moderate risk, now might be the time to look into muni's.

Comments

Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation ...

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here:   https://tradingstockalerts.com/software/downloadpatch Contact us if you have questions or identify any new issues.

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...