Municipals are "a credit market with a rates problem," says Morgan Stanley's Michael Zezas, seeing a base case (60% probability) of total returns of -1.7% to -4.1% in 2014. The bulk of the negative returns should come early, he says, thanks to the 10-year Treasury yield rising to 3.45%.
The bull case - in which the economy slows and the 10-year yield slides to 2.3% - has munis returning between 3.5% and 6%. The bear case - growth jumps and the 10-year rises above 4% - sees losses of 6.2% to 10%.
When to jump in? When "loss cushions outpace expected rate increases," he says, and when "market duration has extended."