Investing

A Low-Risk Way to Tap the Risky Muni-Bond Market

The manager of Fidelity Intermediate Municipal Income, a Kiplinger 25 fund, says the muni market isn't as scary as it seems.

Rarely has the normally unglamorous municipal-bond market been so much in the spotlight. Financial analyst Meredith Whitney recently went on 60 Minutes to predict disaster in the muni market amid a surge of defaults by cities and counties. The dreadful public finances of state and local governments are front-page news. “I’m not sure I’ve seen a time of greater uncertainty in our market,” says Mark Sommer, co-manager of Fidelity Intermediate Municipal Income (symbol FLTMX), a member of the Kiplinger 25.

Consider some of the blows absorbed by the muni market in recent weeks. Interest rates on Treasury bonds rose, eating into muni-bond prices (bond prices move in the opposite direction of interest rates). Congress extended the Bush tax cuts and ended the Build America Bond program, both of which are negative events for the tax-free muni bond market (BABs are federally subsidized taxable muni bonds that provided a cheaper source of financing for their issuers).

From late October through mid December, Fidelity Intermediate Muni shed 2.4%, compared with a 3.9% decline for the Barclays Capital Municipal Bond Index. Year to date through December 29 the fund gained 2.6%, slightly ahead of the index. Fidelity Intermediate yields 3%, as of mid January, which is equivalent to a taxable yield of 4.6% for someone in the top federal tax bracket of 35%.

Sommer says that market volatility has created some attractively priced muni bonds but he adds that investors must pick and choose carefully among the tens of thousands of issues. For instance, he’s been looking at health-care munis because “there’s been kind of a knee-jerk reaction” to the potential impact on hospitals from health-care reform. “We spend a lot of time understanding which names are essential, resilient market leaders,” he says.

In recent months, Sommer says, he’s sold a number of munis with triple-A and double-A credit-quality ratings because he thought they had become richly priced. He considers lower-grade single-A bonds the most attractive on the municipal credit spectrum and has also increased his fund’s holdings of triple-B issues.

Not surprisingly, Sommer doesn’t think the situation in muniland is nearly as dire as what’s painted by the media. He notes that tax revenues have been growing again the past six months and that some state and local governments have made progress in addressing their structural budget issues. Unlike the case of European sovereign debt, to which some compare our muni woes, debt service is a relatively low percentage of U.S. state and local government expenditures.

Moreover, just as in corporate bonds, there is tremendous diversity in the muni market, ranging from pristine to dangerous credits. “If you don’t have expertise, read the newspapers and watch 60 Minutes, then munis are a scary place to be,” says Sommer. “But if you’re set up with a large research staff, as we are at Fidelity, to evaluate bonds on an individual basis, then this market doesn’t seem so scary.”

Most Popular

Dying Careers You May Want to Steer Clear Of
careers

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
5 Top Dividend Aristocrats to Beef Up Your Portfolio
dividend stocks

5 Top Dividend Aristocrats to Beef Up Your Portfolio

The 65-member Dividend Aristocrats are among the market's best sources of reliable, predictable income. But these five stand out as truly elite.
September 14, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021

Recommended

ETFs and Mutual Funds with Todd Rosenbluth
Index Funds

ETFs and Mutual Funds with Todd Rosenbluth

Which is better: ETFs or mutual funds? And how do you decide where to put your investments? CFRA fund expert Todd Rosenbluth has some answers. Also, h…
September 22, 2021
These 2 Emotional Biases Could Kill Your Retirement
Investor Psychology

These 2 Emotional Biases Could Kill Your Retirement

Are your emotions sabotaging your retirement plans? Some basic knowledge and careful introspection can go a long way toward avoiding major pitfalls.
September 20, 2021
Investment Strategies for the 4 Stages of the Economic Cycle
Markets

Investment Strategies for the 4 Stages of the Economic Cycle

The U.S. economy is cyclical in nature, surging ahead and pulling back in waves over time. Investors’ portfolios need to change with the rise and the …
September 19, 2021
Is a Target Date Fund Right for You?
investing

Is a Target Date Fund Right for You?

You're busy, and poring over investments is a pain. Wouldn't a target date fund be easier? Take a look at their pros and cons to see if incorporating …
September 14, 2021