It's a good time to have 'some assets in the muni bond market': Sierra Mutual Funds CIO

Sierra Mutual Funds CIO Terri Spath says, "A good place to have some assets is the muni bond market" amid COVID-19. She joins Yahoo Finance’s On The Move panel to discuss.

Video Transcript

ADAM SHAPIRO: Yahoo Finance. We were watching a rally on Wall Street with the Dow up more than 1,000 points. One of the things we've been watching, of course, is fixed income. We've been watching muni bonds as well. Terri Spath is the CIO of Sierra Mutual Funds. And she's joining us now to help us understand what that world is looking like right now. And we saw huge outflows from muni bonds.

Where do we stand now? Because with interest rates so low, it seemed like cities and states might be in a ver-- well, the expression in the Midwest is the catbird seat which means a good thing. What do you think?

TERRI SPATH: Yeah, and thanks for that intro. The muni market can sometimes seem pretty boring especially on a day like today. But before I lose all of your viewers, I mean, boring can be something that's very interesting at a time like this. I love that last segment with the quote from Jamie Dimon's letter about the world just sucks right now. So if-- and that was Jamie Dimon's quote, and I loved Julia's report on that.

And if you feel that way, you know, I think it's a good time to look at your portfolio and see if it was crash tested during this most recent crash. And a good place to make sure that you have some assets isn't the muni bond market. As you pointed out, there were some outflows. That was a technical issue that really pushed the prices around.

But if you, you know, look at municipalities in the states and the governments, they went into this crisis in a very healthy way. Just like if you go into surgery healthy, you're going to come out pretty well, and so that's our view right now on the muni market.

JULIE HYMAN: Hey, Terri. It's Julie here. I want to ask you about issuance as well. Because we know the federal government is outlaying an enormous amount of stimulus money for this whole thing. What's happening on the municipal level and on the state level? And are they going to be doing a lot of issuance in order to fund all of these initiatives?

TERRI SPATH: There's been a little bit of issuance from our understanding of that, but that's pushed up the yields that they've had to pay in order to issue that debt. Now, yields were very low at the end of February. In fact, the muni market looked quite rich at that time. Similar to the stock market, right? It looked a little bit too expensive.

At this point, it's a lot less expensive. But municipalities that are issuing have had to pay a little bit more in yield and that's repriced the entire muni market, pushing those yields up and the prices down a little bit. But what that has done is made this market look more attractive from a total return perspective. So from that point of view, again, we're still pretty constructive on that.

BRIAN CHEUNG: Hey, Terri. It's Brian Cheung here. I don't think muni markets are boring. I think right now, it seems like it's a really exciting time, actually, because of all the volatility that we've seen. But it seems like liquidity has been a big issue, that I was chatting with the mayor of Jersey City who said he saw bond yields spike to a level where they were pricing in default, and he knew that his city wasn't at risk of default.

So I guess I'm wondering. It seems like some of the pressure's come off since the Federal Reserve announced that it would be offering some short-term liquidity for those shorter dated bonds. But do you think the Fed needs to do more given where you see pricing stall? Are there still counterparties in the space? Or do you worry that the Fed might actually have to step up and directly buy bonds to ease the pressures there?

TERRI SPATH: Yeah, you point out some interesting elements of the muni market that are boring at all. I'm glad you feel the same way as me. In terms of widespread defaults, again, we don't really see that right now. But as you pointed out, the Fed is doing a lot on the shorter end of the curve.

But there's been a lot of volatility in the prices. I mean, what we would really point out is that the way to participate in the muni bond market isn't necessarily directly owning the bonds or even owning the ETFs. The bonds can be very illiquid. If you own them personally, the ETFs a bounce around a lot. There's a lot of technical [AUDIO OUT] that go on in that.

So we're big fans of actively managed mutual funds where you have huge research desks that are able to ensure that they can do those deep dives into these bonds and make sure that what they're getting is not going to default. That all said, the widespread defaults at this point are not very likely, even if they're priced [AUDIO OUT] that in a little bit. As you pointed out that in New Jersey that, you know, pricing for someone's bonds priced in default, and that was not going to be the case. So there's been a lot of opportunity like that in this market.

ADAM SHAPIRO: And so that brings us back to where we opened on this, which is where you said a lot of cities and states were in a healthy position. But I got to challenge you on that. Illinois, Chicago, Connecticut, the City of Dallas, there was a whole lot of hurt before this crisis in the muni bond markets. And those cities and those states, whether they can default or not is a legal issue for another discussion. Would you really buy them despite the Fed being there right now? Those problems didn't go away.

TERRI SPATH: Right. So I think you are pointing out some individual problems. So let's just take Illinois, for example. If Illinois is having problems, does that impact the state of California's municipal bonds? It doesn't necessarily. So it's a very interesting asset class in that the risks for one particular state aren't necessarily going to impact the risk for other states.

Which, again, gets to a point that you don't want to buy the ETFs in this space. And I'll name them. Like, NUV is the largest in the muni bond intermediate space. HYD is in a high-yield muni space. We don't recommend that you purchase those. Why? Because they're going to have exposure to all of those issues that you just pointed out. And the bigger the issuance, the bigger the problems, the bigger the exposure in the ETFs. So again, we point your viewers to look at actively managed funds that can avoid those landmines in the muni space that do actually exist.

ADAM SHAPIRO: Kerri Spath is the CIO of Sierra Mutual Funds. And we want to get you back when we can talk about those landmines more in depth, because this crisis will pass, and that's something we will continue discussing. All the best to you, Terri. Thank you for being here.