Benz: Miriam, I just want to quickly discuss what's been going on in the muni market. There have been a lot of scare tactics out there, if you will--Meredith Whitney's 60 Minutes report where she was talking about potentially cataclysmic levels of defaults in the muni market.
From what you're hearing, and you are certainly a specialist in the muni market, what do you think about what happened to munis in the fourth quarter? Are there more risks to come? How should investors be thinking about that sector?
Sjoblom: Well, it's interesting that this sell-off for munis didn't coincide with a spike in defaults for munis. But it did coincide with rising Treasury yields on the one hand and increased attention in the media. Individual investors make up a huge portion of demand in the municipal bond market. It's about two-thirds when you count mutual funds and individually owned bonds, et cetera. Retail investors' appetite for municipal bonds can have a very big impact on the market.
So, we've just seen--it's continued into 2011 so far--record outflows for municipal bond funds and that can really have an impact. Muni fund managers know their job is to get tax-free income to their shareholders. They try to stay fully invested. When a muni fund manager has to sell, even a high-quality bond, it can be difficult if there's no one out there who wants to buy it.
So, I think that to the extent that these headline concerns continue to impact investor demand, I think you can see definitely some rockiness going forward, but so far even what we're hearing in 2011 is as yields rise on municipal bonds, they are starting to become attractive to taxable bond managers who don't need the tax exemption; the yields are that attractive. So, taxable bond managers can step in and buy.
I think from a credit risk standpoint, the confidence that some taxable bond managers, who can invest anywhere they want, have in Build America Bonds, the taxable segment of the municipal bond market, kind of speaks volumes about whether these credit concerns are overblown or not, or whether there are good opportunities out there, even though things are looking bad for some issuers.
Benz: So they are not required to invest in municipalities, and yet they've bought some of these Build America Bonds?
Sjoblom: Right. Would you like to know who? PIMCO, Met West, Dodge & Cox, BlackRock.
Benz: (joking) So, all the dumb money, right?
Sjoblom: Yeah (laughing). So, that's some pretty good confidence, I think.