Jason Stipp: So speaking of, if you were going to go out and take a little bit more risk, there's a lot of headlines about California, a lot of headlines about Illinois. What is the actual risk of default in some of these areas? Is it something that you're really worried about, as you're thinking about managing a portfolio? And how should investors think about the possibility?
John Miller: Well, first of all, muni credit, again, it's a differentiated area. And it's a complicated area right now, especially because the vast majority of the municipal bond market no longer enjoys the protection from monoline insurance companies. So we are based on the underlying credit fundamentals of the municipality. From a macro perspective, we feel that the credit is in a bottoming-out process right now, in the trough, and municipal credit will be improving in the future. It may not be an immediate snap back, because municipal revenue streams are still down. Most of their revenue streams are from taxes, such as personal income taxes and sales taxes. Those revenue streams are down.
What that's done in California and Illinois and Michigan, and many other states, is that it has opened up prospective budget deficits, even for this year, for the year 2010. Those deficits have to be closed. As you go through the political process of trying to close those budget deficits, that means cutting spending, that means raising taxes--very unpopular moves, and generates political controversy.
It could generate credit ratings downgrades, if the government doesn't respond quickly. In our opinion, it is very unlikely to actually generate defaults, because we're talking about full faith in credit of municipal governments, which has held up very, very well through many recessions. We expect it to hold up well through this recession also.
Stipp: OK, so if you had to then--based on what you've been telling me about the risks and also the yield curve, if you had to say where you're seeing really the best opportunity for a muni investor right now, given the adjusting for the risk, where would you see that today, in this environment?
Miller: Well, first of all, essential service revenue bonds--that might be in the utility area. Private schools and universities are a couple of sectors that offer a lot of relative credit stability. The transportation sector, like airport bonds, toll roads, bridges, those tend to be very stable in their revenue streams. Particularly, in terms of the yield curve, again, the yield curve is very steep. So for some portion of a portfolio, which can handle potentially some interest rate volatility, extending out into the 20-25 year range on the yield curve offers a substantial yield pickup. Then, from a ratings category perspective, there's a significant amount of spread in single-A munis and triple-B munis, which historically have extremely low default rates, akin to that of a triple-A corporate, over the long run on cumulative annual default rates. So those are a couple areas from which to look. But everything in the muni market has to be looked at on a one-bond-at-a-time basis, from the bottoms up.
Stipp: All right. Well, John, thanks so much for your insights and for being with us here today.
Miller: Thank you very much for having me.
Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.