Wall St bets against Whitney's dire view on municipal debt
NEW YORK (Reuters) - Top fund managers are challenging the bleak forecast for the U.S. municipal bond market by Wall Street analyst Meredith Whitney and are selectively buying high-quality bonds with robust return rates.
Whitney, who made her reputation by predicting in October 2007 that Citigroup would need a massive capital infusion, warned investors this week that as many as 100 U.S. cities and other municipal issuers would default on their debt this year.
Her comments contributed to a sell-off that drove yields on top-quality 30-year muni bonds to more than 5.0 percent on Thursday, near two-year highs. The muni market has been steadily declining since November on a combination of factors, including an oversupply of bonds.
The renewed selling pressure is creating significant buying opportunities for long-term investors, the fund managers said, even as they do not rule out a further sell-off in the market.
This is exactly the right moment for long-term investors to snap top-rated bonds offering tax-equivalent returns of as much as 9.5 percent, argued Hugh McGuirk, head of the municipal bond team at T. Rowe Price, with more than $439 billion under management.
"There are pockets of opportunity for the long-term oriented investor. You can buy a AAA Harvard 30-year bond at 5.0 percent today, and that's a taxable-equivalent yield of around 8.0 percent," McGuirk told Reuters in an interview.
"That (yield) would have made an awful lot of people happy in the past decade."
The perennial attraction to munis, of course, is that their interest is generally exempt from federal income taxes, and from most state and local income taxes for bonds issued in the investor's home state.
A-rated securities offer even more compelling returns, said Christopher Ryon, a portfolio manager with Thornburg Investment Management, which oversees $75 billion in assets.
"With the loss of municipal bond insurers -- 50 percent used to be insured, now that's running about 6 percent -- spreads on A-rated securities versus AAA-rated securities have widened dramatically," Ryon said.
"We think that's a great opportunity for investors, especially those who can do the credit work."
Even as outflows from the muni market extend for a ninth consecutive week, Ryon says there are anecdotal reports of crossover buyers stepping into the market.
"That sometimes indicates a market bottom," he said.
T. Rowe Price's McGuirk says the momentum is still negative for the muni market as individual investors hold off buying amid all the bad publicity for munis.
Bleak forecasts such as Meredith Whitney's could prove to be true in the long run if governments fail to address pension and healthcare liabilities, but that is far from being a short-term problem for most states and municipalities, says McGuirk.
He believes Whitney is even doing a favor to the market.
"All the noise that she is making is creating an environment where politicians can be bold to make the very tough political decisions to address these long-term issues."
Investors able to stomach some near-term volatility could buy now A-rated bonds at a 6 percent yield, which equals to taxable-equivalent returns of about 9.5 percent, McGuirk said.
"You might not be picking the bottom of the market today, but when it's clear for the market that we have bottomed up, you won't be able to buy a bond because nobody is going to sell them."