Ranking about dead last a year ago in Barron's handicapping of where to go for yield, municipal bonds climb nearly to the top for 2014. Long-term issues yield 4.5-5%, towering over the 30-year Treasury at 3.8% ... and don't forget the tax exemption. Credit worries are high, but the "real news is that the credit profile of local governments throughout the U.S. will improve as property valuations rise, local sales and income-taxes increase, and major reform of public employee pension plans accelerates," says John Loffredo, co-manager of the MacKay Shields Municipal High Yield Fund.
Topping the list are the best performers from last year: dividend stocks. Even after a big rally, plenty of blue chips yield more than the 10-year Treasury and payouts are still low, says S&P's Howard Silverblatt, who sees a double-digit rise in cash payouts this year.
Near the bottom of the list this year after a big move in 2013 are MLPs, which trade for nearly twice the valuation of utilities and telecom, based on Enterprise Value/EBITDA. Yields are tasty at 5.5%, but many MLPs barely cover their payouts - a contrast to the vast majority of dividend-paying corporations. Stick with MLPs comfortably covering their distributions like EPD and PAA.
Gundlach: Tell us how you really feel, Jeff. "TIPS (TIP) are probably the worst asset class in the U.S. ... I have talked myself blue in the face (previous) trying to get investors not to buy (them)." Given their recent big declines, he doesn't hate them as much as a few weeks ago, but he's still not a buyer. On municipals (MUB), he's a buyer, particularly in closed-end funds who've been doubly whacked thanks to growing discounts to NAV. A sampling of muni CEFs: NIO, NVG, BTT, NPM, NRK, MUC, VCV, NEA.
With today's gain, the iShares AMT-Free Muni Bond ETF (MUB +2.1%) has its biggest two-day rally since the financial crisis. but is still off more than 5% YTD. "We are taking advantage of this very opportunistic time," says Cumberland's David Kotok, reiterating a bullish stance he's had for a couple of weeks. "We see no more attractive alternatives."
Municipals (MUB) are a buy, writes David Kotok, noting an above-4% yield for very high-grade tax-free muni paper - a taxable equivalent yield above 7%. He suggests fixed-income markets (AGG, BND) have overreacted to the poor communication policies of central banks. "We are now lengthening duration ... If the market wants to give us bargains, our job is to take them." Some closed end muni funds at discounts to NAV: NIO, NVG, BTT, NPM, NRK, MUC, VCV, NEA.