S&P/Dow’s Rieger: Time To Look At Munis

February 11, 2014

Munis can offer better value than corporate bonds, S&P’s Rieger says.

Muni bonds got bad-mouthed a fair amount last year, but it might be time to revisit them, as valuations in the space look pretty cheap relative to corporate bonds. It’s true that the muni market has its troubled hot spots—like Detroit last year and now Puerto Rico. But don’t throw the baby out with the bath water, as investors looking for investment-grade, tax-free debt might find the muni space prime for picking.

S&P/Dow Jones fixed-income expert J.R. Rieger discussed the muni market with ETF.com staff writer Cinthia Murphy, noting that S&P has adjusted its coverage of Puerto Rican munis, and more broadly, that while rising interest rates present bond investors with definite challenges, they aren’t all bad.

ETF.com: Is this a good time to get into the muni market? How does it compare with the opportunity set in corporate bonds?

J.R. Rieger: We can’t make forecasts in our roles, so I have to let you decide whether munis are cheaper or not relative to other fixed-income asset classes, but in my opinion, they are.

When we look at yields relative to corporate bonds or Treasurys, they’re significantly cheaper. When we look at yields from a taxable-equivalent yield perspective, we can see that that yield—which is really what you get to keep—is a representative value of what you’re actually keeping versus corporates.

You actually get to keep a lot more of your tax-free income than you would if you had the same type of bond, the same yield and the same duration in the corporate world. So, just from a yield perspective, munis look cheap relative to other asset classes.

Now, in terms of quality, on an average quality, investment-grade munis are much higher quality than corporate bonds of investment grade. On corporate bonds, there’s a big band of BBB-type of issuance that’s out there. On munis, it goes from AAA to AA to A. It’s skewed to the higher quality. So, munis overall are higher quality.

But there’s one more difference between munis and corporates, and that’s liquidity. If you’re buying individual bonds, munis are less liquid than corporates because the corporate bonds come much bigger in size. They have more secondary support than munis, while there are tens of thousands of muni issuers, so the muni deals are smaller. The liquidity difference is significant, and that’s why sometimes munis are cheaper.



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