Whatever became of Meredith Whitney's December "doom and gloom" prediction for the municipal market?  Beyond public anxiety and a sharp drop in prices, it would appear that muni bond portfolio managers are largely dismissing fears of "significant" muni defaults and “hundreds of billions” in losses for investors.  

At last week's Morningstar Investment Conference in Chicago, a panel of managers said the market remains attractive despite the risks and worries fanned by high-profile analysts like Meredith Whitney. 

“The predictions of widespread defaults that are going to decimate municipal bond portfolios are completely preposterous."   -- Michael Brooks, Sr Portfolio Manager at AllianceBernstein.

Mr. Brooks shared the podium with John Cummings, head of the muni bond desk at PIMCO, and Lyle Fitterer, head of the tax-exempt fixed income team at Wells Capital Management.  Moderating the discussion was Miriam Sjoblom of Morningstar.

In fact, the collective reaction of the panel was more of a collective yawn. They refer to Ms Whitney's statements as "sensationalism" which does a disservice to investors.  On the bright side, however, Mr. Fitterer said that such fears have created some opportunities to buy munis cheaply.

“Default is a tiny risk because issuers do not want to be shut out of the credit market," said Mr. Brooks, who pointed out that municipalities, unlike corporations, don't have options of “moving to Barbados” and therefore must plan on maintaining an ability to borrow in the future.

PIMCO’s Cummings assessed munis as a relative bright spot in his firm’s outlook on bond markets, and are "attractive relative to other U.S. fixed income assets for a U.S. taxpayer." 

“Clearly tax rates are going to be higher in the future than they are now,” said Brooks, adding that munis will remain attractive for tax purposes barring a development — which he thinks unlikely — such as Republican presidential hopeful Tim Pawlenty’s proposal to eliminate taxes on interest and capital gains.

[AdvisorOne, 6/10/11]