Where should investors look for the best values in today's municipal market? Bubba Bennett, senior vice president and director of national fixed income marketing at Prudential Securities, suggests investors consider bonds that will mature in the next six to 15 years. "The best part of the yield curve is the six- to 15-year range. Beyond 15 years, the curve is flat," says Bennett, and investors won't make much more for an increased risk. He gives this example: If a 30-year AAA-rated municipal bond yields about 5.1 percent, a 10-year bond with the same rating yields about 4.35 percent. Investors in the 10-year maturity would get 85 percent of the yield of the 30-year bond, but they would experience much less volatility. Because yields and market values fluctuate, an investment sold before maturity may be worth more or less than its original cost.
Another area Bennett suggests investors check out is the insured municipal market. Here, issuers with poor credit quality buy insurance that guarantees the timely return of investors' principle and interest. Bonds will carry a AAA rating by Moody's and Standard & Poor's. When yields on 10-year AAA-rated insured bonds are about 4.45 percent, yields on A-rated munis of the same maturity are usually about 4.6 percent. Although this relationship is subject to change, and there's nothing wrong with an A-rated bond, why take the additional risk for only 15 basis points?
If stocks do experience a bear market or, at the very least, a temporary pullback in the near future, municipal bonds can provide a safe haven to protect your profits. A mixture of stocks and bonds has generally proved to be more efficient in the long run than a portfolio of only stocks or bonds. Stocks can provide growth at the expense of volatility, while bonds offer income along with relative credit safety and return of principal. Together, they can provide a knockout team of investments.
Prudential Securities, (212) 778-3750, fax: (212) 778-1072.