"State and local governments have been tackling their issues using budget cuts, taxes, fees and other tools. These choices are painful, but the net result is stronger fundamentals than headlines imply," they said.
For investors able to stomach some credit risk, municipal bonds offer attractive compensation currently relative to historical municipal-bond risk premiums. In addition, at many maturities, municipal bond yields are higher than those of their taxable counterparts, even before factoring in the tax exemption of muni bond income.
Investors might consider a laddered core portfolio of high-quality bonds and cautiously adding bonds with some credit risk for higher yield, said Rob Williams, director of income planning, and Kathy Jones, fixed-income strategist, of the Schwab Center for Financial Research, in a commentary.
Investment-grade corporate and municipal bonds are likely to provide relatively attractive risk-adjusted returns, they said, and should be considered instead of adding yield with lower-rated corporate bonds or emerging-market debt. They'd only add bonds from the latter categories when yields widen relative to Treasury yields. Currently, investors aren't getting paid enough in yield to compensate for the added risk.
The Schwab duo's bond stance is based on their expectations for mild U.S. growth. Although the economy has been relatively resilient late in 2011 and at the start of 2012, there still appears to be significant slack, especially in labor markets, working to keep interest rates low, they said. Fiscal policy (i.e. government spending) appears likely to tighten in 2012, a factor that could be a headwind to the economy. Overall, until the pace of economic growth accelerates or concerns about Europe stabilize, rates will likely stay low, they said.
At BlackRock, which has some $104 billion in muni assets under management, managing director Peter Hayes and team see regulatory risk topping default fears this year. "The U.S. municipal bond market has been prime territory for yield hunters. It has held up well, despite Cassandra-like warnings of defaults and some high-profile bankruptcies," they said. "We see regulatory risk as a bigger potential scourge. The Fed's admission it under-clubbed the size of the market by some $800 billion is more than an 'oops.' It may bring regulation, scrutiny and attacks on the tax-exempt market as a shelter for the wealthy."
Meet EMMA. Bond transparency has improved greatly in the past decade or so. The Electronic Municipal Market Access system, or EMMA, is a centralized online source for free access to municipal disclosures, market transparency data, and education. The site is run by the Municipal Securities Rulemaking Board, the muni market's self-regulator.
EMMA houses municipal disclosure documents that provide information for investors about municipal securities. These include offering documents, called official statements, for most new offerings of municipal bonds, notes, 529 college savings plans, and other municipal securities issued since 1990.
EMMA also provides market transparency data, which includes real-time prices and yields at which bonds and notes are bought and sold. Educational links and tutorials are also available.