Confidence in municipal debt has been shaken and the reaction, whether hysterical or tactical, is real. While analysts such as Meredith Whitney see massive muni defaults ahead, BNY Mellon's Leo Grohowski is much less pessimistic when it comes to the undeniable lure of tax-free investing.
And while he concedes that there is risk from an expected rise in rates as well as the reality that there will be some additional downgrades, he thinks the default rate will stay below 1%, thus making a tax-free yield of 3% to 5% very attractive relative to its taxable equivalents.
"There's no doubt that municipal finances are under pressure," Grohowski says. But "it doesn't mean we should be painting the asset class with one brush."
So before you fire off that tax return to the IRS, maybe it's time to take a look at the muni market again. But if you do decide to dive in, Grohowksi says, be ready to dig a lot deeper than simply knowing the issuer, coupon, maturity and credit rating.
How can one do due diligence on a revenue bond?
Grohowski says, "I think the individual investor needs to make sure that, if they can't do the due diligence...they need to partner with someone who is doing it."
He recommends carefully selected tax frees in a five- to 15-year timeframe.
He also says he thinks QE2 is a wrap in June, going against many experts who expect more stimulus to pour in.
"I think the Fed will very gradually be changing its language in the second half of this year," he says, "to position us for more of a neutral monetary policy."
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