“2008 was the year when the US led the charge of bail-out nations,” says Pimco’s Bill Gross. Barack Obama plans to continue in 2009 with stimulus plans that could come with a $825bn price tag. His cheque book “represents the largest and most potent source of buying power in 2009 and beyond”.
High up the queue for some central US government largesse are the state, city and county local governments, or ‘municipals’, who are estimated to have run up a funding shortfall of around $1trn. As Gross puts it, “to think that California might be allowed to fail is, well, unthinkable”.
So, although municipal bond, or ‘muni’, prices have sunk to the point where the gap, or ‘spread’, between their yields and that on US Treasuries is at record levels, there’s scope for some “attractive price appreciation”. Indeed, average prices are up around 4% since the start of the year on the back of what one analyst on Bloomberg calls “really strong demand”.
The cheapest, and simplest, way to play a rise in the muni market is via the iShares S&P Municipal Bonds ETF (NYSE:MUB). The fund yields 3.7% and the expense ratio is just 0.25%.