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By Christine Benz | 07-29-2010 01:32 PM

Picks and Tips for Curbing Risk in Munis

Municipalities face a tough road, but muni bonds shouldn't be shunned, says Morningstar's Miriam Sjoblom.

Christine Benz: It's no secret that many state and local municipalities are in dire financial straits. So is it time to shun munis or could there be opportunities in municipal bonds?

Here to discuss that question with me is Morningstar's associate director of fund analysis, Miriam Sjoblom. Miriam, thanks for being here.

Miriam Sjoblom: Thanks for having me, Christine.

Benz: So what do you think about this question, Miriam? There are certainly a lot of scary headlines out there about what's going on with the state and local governments' budgets. Is it time to shun municipal bonds or do you think there are some opportunities there, potentially?

Sjoblom: I don't think it's time to shun munis. I think, a lot of the headlines that you read about are bit overblown. They focus on issuers that have had problems well before the recession: things like the State of California; their budget process has always been a highly partisan process that's involved a lot of wrangling, so it makes kind of scary headlines, but in reality the concerns are not as great for bondholders.

Benz: So muni default rates have historically not been super high. Do you think that past history is a reasonable guide to what one might expect from municipals in the future?

Sjoblom: Yes, I certainly don't mean to suggest that municipalities are just as healthy as they ever have been. It's a really tough environment out there. It's the worst environment in many decades, and I think, many managers that I talk to are pretty much in agreement that defaults should be higher. I think, you're going to see them in more places where you'd expect to see them. One area, Florida land-secured bonds for instance. It's not necessarily going to be a surprise where you're going to see them, although some local governments have really had a hard time and there have been some bankruptcies.

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