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By Jason Stipp | 01-28-2010 10:43 AM

Munis Have Snapped Back. Now What?

Following munis' strong runup, investors now have to be prepared to take on additional risk to pick up additional yield and total return opportunities, says Nuveen Investments CIO John Miller.

Jason Stipp: I'm Jason Stipp for Morningstar. A lot of twists and turns in the muni market over the last two and a half or three years. Here with me to talk about how he navigated that downturn is John Miller. He's CIO of Nuveen Asset Management. He's also going to tell us a little bit about what he's seeing today in the muni market. John thanks for joining me.

John Miller: Thank you for having me.

Stipp: So, when we look back through the credit crisis that we just went through, obviously a lot of differences in performance between funds and what we see in the muni market and the market overall. What were you seeing, 2007, 2008, through the downturn and what have you seen in the last year coming back?

Miller: The most significant features of the performance of muni funds in 2007 and 2008 was the fact that interest rates on municipal bonds were rising and credit spreads were widening. So, funds that were more exposed to the longer end of the yield curve, so they had higher durations and higher interest rate risks, those were hit harder. And funds that were exposed to triple B-rated muni bond credits or non-rated muni bond credits, those were hit harder because those credit spreads were widening out. Much of which was due to a less liquid trading environment and some of which was also due to the downgrades of the insurance companies that guaranteed a lot of municipal bond securities.

Stipp: So in some cases the value of the municipal bonds wasn't... If you could hold onto it. If you didn't have to sell it, then potentially the value could snap back. And it was just the fact that nobody at that time was buying.

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