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By Jeremy Glaser | 02-16-2012 09:00 AM

Sommer: Munis Still Attractive for More Than Just Yield

Munis' tax-equivalent yields remain compelling especially for investors in the highest tax bracket, says Fidelity muni manager Mark Sommer, but there are other good reasons to own them.

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser.

Investors have been funneling money into municipal bond funds over the last 12 months, but are there still opportunities in the sector?

I'm joined today by Mark Sommer. He is a portfolio manager at Fidelity, to answer some of these questions.

Mark, thanks for joining me today.

Mark Sommer: You're very welcome.

Glaser: Let me start off by asking, on a tax-equivalent basis, how attractive are munis today given the run that we've seen over the last 12 months?

Sommer: I think it continues to be very attractive, especially for those in the highest tax bracket, but there are many ways to look at it.

I think one of the traditional ways that investors have viewed the relative attractiveness is by comparing triple-A muni yields to Treasury yields, which I think is a little bit of an obsolete notion at this point.

A way that I like to think about it is just looking at the yields on investment-grade muni funds relative to investment-grade taxable funds, and of course you need to make adjustments for quality and duration. So it's not always easy to get very good comparisons there, but if you look at those relative yields munis look quite compelling relative to taxable investment grade bond funds at this point in time.

I would add to that that there are good reasons to own munis even independent of the ... tax equivalent yields, and that is due to their diversification benefits and their relative safe haven compared to other fixed-income sectors.

Glaser: Certainly, you said that they're safe haven, but there are some risks. One being rising interest rates. The Federal Reserve seems pretty committed to keeping those rates low for a while, although it seems like they might rise eventually. How are you protecting against those rising interest rates, and what impact do you think rising rates would have on the muni market?

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