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By Jeremy Glaser | 08-09-2011 12:17 PM

High-Quality Muni Bonds Holding Up Well

Investors are turning to high-quality municipal bonds as they search for safe-havens from market turmoil, says OppenheimerFunds' Dan Loughran.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Muni bond investors have been wondering how their portfolios have been performing through all the market turmoil. To answer some of these questions, I'm here today with Dan Loughran. He is the senior vice president and senior portfolio manager of OppenheimerFunds.

Dan, thanks for taking the time today.

Dan Loughran: Hi, Jeremy. Thank you for having me.

Glaser: So, the first question I have is, how have the muni bonds been performing through this market turmoil? Have they held up pretty well?

Loughran: Yes. The muni market has held up fairly well, considering what we're seeing go on in the equity markets. In fact, it's been encouraging to see high-grade muni bonds move in step with Treasury bonds, rallying in price after the downgrade of the sovereign credit rating.

Now, high-grade munis have improved in price since the downgrade, but only slightly. So they have trailed the upside of the Treasury market but at least encouraging to see them moving in the same direction.

In terms of lower-rated or high-yield sectors of the muni market, those bond prices have fallen slightly. Again, it's nothing in comparison to what we've seen in the equity markets or, even for that matter, what we've seen in corporate high-yield bond markets. But they are off slightly. Again, this is part of the old risk-on, risk-off trade. Monday was a big time risk-off trade.

Tuesday, though actually with the equity markets improving, corporate high-yield bond markets improving, I expect to see some stability to return to the high-yield part of our market. One particular place where investors often look are the muni exchange-traded funds. There was a high-yield muni ETF and that was down sharply in price Monday. That's rebounding Tuesday. I think that should help alleviate some of the fears in the lower-rated parts of the muni market, but the high-grade part of the market, as I've said, I'm pleased to see is has been really moving in step with Treasuries.

Glaser: So, let's take a closer look at that downgrade. Do you have any thoughts on S&P's downgrade of the sovereign debt of the United States and what impact that will have on the potential ratings of the individual municipal bond issues?

Loughran: Yeah. I guess, first, just my general view of the downgrade itself, I completely disagree with the move by S&P, and I remember, of course, Moody's and Fitch affirm their AAA ratings. I agree with them. I also agree with Warren Buffett, who Monday came out and said that the U.S. Federal government should be quadruple-A-rated. To me this is just S&P moving a step closer to becoming irrelevant.

That all started with their overrating of mortgage securities some years back. For years it had underrated muni bonds compared with other fixed-income sectors. So, I think certainly the firm gets a lot of press and notoriety, but their actual performance over the last several years leaves a lot to be desired; again, just another step towards irrelevancy.

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