Courtesy of Mish.
David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer believes Municipals Cheap After Detroit Filing
Municipal bonds are an “outrageous bargain” in the wake of Detroit’s bankruptcy filing, according to David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer.
Kotok bases his arguments on a comparison on General Obligation Yields to US Treasuries.
Muni vs. Treasury Yields
More on Munis
In a followup guest post on the Big Picture blog, Kotok offers More on Munis, Detroit, Bloomberg, Whitney & Wilson.
In our recent commentary on municipal bonds and Detroit, we argued in favor of buying the highest-grade AAA tax-free municipal bond It currently yields more than the corresponding taxable US Treasury obligation.
Meredith Whitney, Muni Cassandra emeritus (ae?), weighed in against Munis (FT) and used the Detroit default to say her version of “I told you so.” Bloomberg reported both sides of the argument.
Readers may seek Whitney’s positions and her history of Muni-forecasting on their own. Our position is clear: do the research and buy the bonds that make sense. There are many of them. This is an idiosyncratic market of $3.8 trillion; painting it with a broad brush is a mistake.
We took the position that the default history of the true AAA-rated tax-free municipal bond has the same default history as the US Treasury bond: neither has ever defaulted.
Remember, we are referring to the natural rating of the bond. We are not referring to those bonds that were insured by various bond insurers and thus elevated to an AAA rating because of the bond insurance. Bonds that were rated AAA only because of the insurance have defaulted, but the underlying ratings of those insured bonds always fell below AAA. No true AAA credit ever needed bond insurance to sell a new issue.
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