In the wake of the Detroit bankruptcy filing, some are taking a second look at their municipal bond holdings, but muni investors shouldn’t completely abandon the sector.
Fund experts believe that even with the Detroit filing now is the wrong time to abandon munis, writes Chuck Jaffe for the Seattle Times.
Jaffe points out that the dearth in muni bond doom-and-goom stories indicates that managers know what they are up against even before the Michigan mishap garnered nationwide attention.
“Any fund manager worth his salt has seen this coming, as Detroit’s problems did not pop overnight — they were well publicized and covered in muni circles,” Christopher Keith, who manages bond portfolios at Adviser Investments, said in the article. ““This means that your higher-quality focused portfolio managers had time to work out of their positions or, at the very least, reduce exposure to the point where it will not cause noticeable harm.”
Meanwhile, some other municipalities are also facing revenue shortfalls and underfunded pensions, but they could take the negative default publicity to strive for legislative and administrative changes.
“Despite this and other highly publicized pockets of trouble, municipal bonds remain a safe, low-risk and conservative asset class,” Keith added.
“There are still good opportunities at the national level in the muni market and this is not an asset class you want to abandon, because the tax equivalent yield is still very competitive compared to the rest of the bond market,” Russ Koesterich, chief investment strategist for BlackRock, said in the article. [iShares: How Detroit’s Bankruptcy Affects Bond ETFs]
Moreover, muni funds also include a diversified portfolio of general-obligation bonds and essential-purpose bonds, such as water or sewage treatment bonds that support self-sufficient utilities. General obligation bonds use available resources, including tax revenues, to repay bond holders. After the Detroit case, the general-obligation side could become less-secure. [Muni Bond ETFs: Detroit City Blues]
ETF investors can comb through a number of muni related funds to gain diversified exposure to municipal bonds. Additionally, investors can avoid general-obligation bonds with the recently launched db X-trackers Municipal Infrastructure Revenue Bond ETF (NYSEArca: RVNU), the first ETF to focus on the space.
For more information on munis, visit our municipal bonds category.
Max Chen contributed to this article.