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By Jeremy Glaser | 01-26-2011 03:53 PM

An Interesting Muni Entry Point

Overblown credit fears and several technical factors have created attractive opportunities in the municipal-bond market, says Nuveen Investments' John Miller.

Jeremy Glaser: For, I'm Jeremy Glaser. I'm very pleased today to be joined by John Miller. He is the Manager of the Nuveen High Yield Municipal Fund. We're going to talk a little bit about the municipal market and how the recent trials and tribulations there could impact investors?

John, thanks so much for taking the time today.

John Miller: Thank you for having me.

Glaser: So, a lot of investors who are in municipals think of them as kind of a staid asset class. Over the last few months there has been a little bit more volatility there than usual. Can you walk us through some of the key drivers of that recent volatility?

Miller: Absolutely, the municipal bond market has been hit by certain activities, some of which are technical in nature, so there has been a lot of new issue supply coming into the year end 2010. At the same time, municipal investors have pulled money out on net from open-end mutual funds and that's created at least temporarily a shortage of demand for some of those bonds. That has been heightened by credit fears, which in our opinion, are overblown on a broad-based basis. Even though there are some credit risks in the municipal bond market, we think that there are actually some improving trends here.

So, it's created an interesting entry point for some investors looking to get exposure to tax-free bonds because they yield significantly more than most bonds even in the taxable corporate bond market or in the treasury market. Again, I think some of these fears are perhaps exaggerated a little bit on the credit side.

Glaser: Let's take a look at some of these issues, the first being new issuance. How much of this was driven by the expiration of the Build America Bond program? How much do you expect to see increased issuance in the municipal space over 2011?

Miller: That's been a significant factor. A lot of this is political. The Build America Bond program was instituted by the American Reinvestment and Recovery Act, which started back in early '09 and it's been a nice tool for municipalities to access the capital markets issuing taxable bonds. Now, that program expired at the end of 2010, but issuers wanted to take advantage of that program. So, they took advantage as greatest extent possible by issuing as much supply as they could in the fourth quarter of 2010, bringing total 2010 supply up to $430 billion, which is a lot for the municipal bond market.

I see supply trailing off. It's gotten off to a very slow start thus far in 2011 and we expect 2011 to be a relatively low supply year. Plus municipal bonds are constantly getting called and investors are receiving sinking fund payments, which are partial principal payments and bonds always maturing in the muni bond market. So, we could be going from an overabundance of supply in the fourth quarter of 2010 to much lighter even scarcity of supply in 2011.

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