David Hammer, Head of Municipal Portfolio Management for PIMCO, says the best opportunity today for municipal bond investors is in the high yield space. That’s not just because of interest rates. It’s got more to do with bond spreads than yield itself.
“The spread between a BB rated and an AA rated muni-bond is wider than BB and AA corporate bonds and that doesn’t happen often,” he says in this interview with RIA Channel founder and CEO Julie Cooling. “That tells us there are opportunities in high yield munis.”
Investors evaluate spreads, or risk premiums, to gauge the relative value of a bond investment and whether it has been mispriced by the market. Investors who believe, for example, that spreads are too wide will position for a tightening, or narrowing. PIMCO believes high yield is going in that direction.
Hammer talks about what he thinks is the best way to access higher yielding municipal bonds. PIMCO has around $40 billion in assets under management in the muni markets.
He says that financial advisors who are coming to PIMCO looking for 3.5% income in a separately managed account often find they need to increase duration risk, due to lower global interest rates, or consider a mutual fund instead.
The biggest tailwind for munis right now is the lack of progress on comprehensive tax reform. Hammer gives viewers a sense of where the firm thinks taxes are heading. And gives some advice for investors who might be reconsidering Puerto Rico following this month’s default.