The recent wave of panic sweeping across the municipal bond market is creating buying opportunities for professional money managers, according to Josh Gonze, manager of the $4 billion Thornburg Limited Term Municipal Bond Fund (LTMIX).
“As professional bond investors, we are always waiting for swoons like this, and that's why we have been buying in November and December,” he said.
Mr. Gonze admits there are risks in the muni bond market but advises investors to remain diligent and patient, because he does not believe that the market is poised to fall off a cliff, as some recent reports have suggested.
“It's a matter of having a response to credit risk that's appropriate,” he said. “A sell-off like we've seen over the past month creates buying opportunities.”
More than $9 billion was pulled out of muni bond funds over the five weeks before Christmas. The end-users of municipal bonds are predominately individuals as opposed to institutions.
The sell-off accelerated after a Dec. 19 segment of “60 Minutes,” in which analyst Meredith Whitney, owner of Meredith Whitney Advisory Group LLC, predicted a rash of muni bond defaults over the next 12 months.
Mr. Gonze described such predictions as “hype” and added that “I think Meredith Whitney's claims are ludicrous.”
He pointed out that historically, muni bond default rates are less than one-tenth of 1%. The default rate for corporate bonds is nearly 1%.
“An increase in the number of muni defaults might take it to 100 from 50, but you have to keep in mind that there are 60,000 muni bond issuers and about a million different bonds,” he said. “Any increase in defaults can seem large if you're starting from a low number.”
Mr. Gonze said he is wary of select muni bond markets and categories, including real estate development, non-profit hospitals and some toll roads.
He described Detroit general-obligation bonds as “potentially risky.”
But he said the widely held California general-obligation bonds, considered an industry bellwether, will not have trouble servicing the debt despite the fiscal challenges facing the state.
In the 2011 fiscal year, Mr. Gonze said, California's general-fund revenue will be approximately $89 billion, the first $36 billion of which goes to education. That leaves $53 billion to cover $6.6 billion in debt service, he added.
“California's general-obligation debt service is second behind education funding,” he said. “The state has plenty of money to pay its debt service.”
While Mr. Gonze warned that “scattered defaults are a fact of life in the muni bond market,” he also cautioned against exiting the market due to fears of worst-case scenarios.
“I think Meredith Whitney has gotten a lot of blowback from some of the comments she's made,” he said. “She is widely perceived as a bank equity analyst, but she's out of her depth in the muni market.”
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