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By Jason Stipp | 11-16-2011 12:00 AM

Fidelity's Sommer: A Very Attractive Point for Munis

The muni market still faces challenges, but with careful research and disciplined risk control, muni investors have plenty of opportunity, says Fidelity's Mark Sommer.

Jason Stipp: I'm Jason Stipp for Morningstar.

Municipal bonds have long been a standby of fixed-income investors, especially those in higher tax brackets. But investors have been on a higher alert over the muni market over the last year.

Here with me to dig into some of the risks and the opportunities in the muni market is Mark Sommer. He's on Fidelity's muni bond team. [Fidelity Municipal Income] is one of Morningstar's Gold rated [funds] for municipal bonds.

Thanks for calling in, Mark.

Mark Sommer: Thanks for having me, Jason.

Stipp: The first question that I have for you: We've seen headlines over the last year about problems in municipalities, and more recently we saw the case in Jefferson County and also the case in Harrisburg.

I'm wondering about these cases and the impact that they might have on the market. We know that headlines don't tell the whole story. But when you look at these cases and you look at the overall health of munis, are these particular cases emblematic of a deterioration that you're seeing?

Sommer: Well, I think that those are fairly special cases and have been going on for quite some time now. They both have very unique circumstances.

More broadly, I would say that municipalities have been under pressure, more as a function of what the economy has been doing. So far, I think that, again broadly speaking, many cities and towns have been well positioned to weather the storm, but there have been pockets of difficulty. And we've certainly seen headlines around those, and we're not out of the woods yet, clearly. We could still see some pain in terms of reduced property taxes, which tend to fit with the lag. But we wouldn't expect to see what some have forecasted as being wholesale muni defaults anytime soon.

Stipp: So, I want to talk to you in a moment about some of the ways that you manage risk in the portfolio. But before we get to that, I'd just like to talk broadly about the sorts of yields we're seeing.

So, one of the things we talk about at Morningstar is the tax-equivalent yield. So, you want to look at the yields that you're getting on munis after taxes versus what you might be seeing in taxable bonds.

Our director of fixed-income research Eric Jacobson said in an interview recently that when you look at the yields that you're getting on taxable bonds right now, even folks who aren't in those highest tax brackets might benefit from looking at what their tax-equivalent yields might be in munis.

When you're looking at the marketplace, what kind of spreads are you seeing and what's the attractiveness of munis in that tax-equivalent context?

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