In the last two parts of this series, we have discussed the spreads between municipal and government debt, and the after-tax yield of junk bonds versus munis. We also examined the current fundamentals of the muni market, and went away with a general feeling that the asset class is getting increasingly interesting, yet isn’t quite irresistible.
We’ll give the last word in this series to James Grant, editor of Grant’s Interest Rate Observer. In this Bloomberg video, he sees the real risk of municipal debt as the same risk facing all fixed income markets – the threat of higher interest rates.
Although this interview is certainly worth watching, I believe it is absolutely essential to include bonds of some form in diversified portfolios – regardless of the rate environment. The role of the advisor is to determine the most attractive part of the fixed income universe for each client. I believe that munis are a sensible choice (as are some mortgage debt) over high-yield and government bonds. But it’s likely that the tax-free sector will get even more attractive due to flows out of muni funds and into equities.
Read more from Ben Warwick on municipal bonds: