In-Depth Look: Municipal Bond Market

The speaker discusses the current state of the municipal bond market suggesting that munis are priced very cheaply and should perform very well in environments where there are higher taxes.  He believes that 2009 will see higher tax rates due to budgetary imbalances which will be closed and also Bush tax cuts which will cease to exist. 

There has been overwhelming supply in the muni market due to constraints on the liquidity positioning of brokerage houses.  Additionally, municipalities are issuing many new issues to fund infrastructure projects.  Eventually, these municipal bonds will rise.

He also suggests that the nationalization of Fannie Mae and Freddie Mac should stabilize the market for mortgage backed securities.  Many hedge funds were forced to liquidate municipal bonds to shore up capital in wake of the crash in MBS securities that they held.  The speaker believes that the MBS stabilization will allow hedge funds to move back into municipal bonds.