El-Erian Says Municipal Debt More Attractive After Election

Pacific Investment Management Co.’s Mohamed El-Erian said municipal debt is more attractive after the re-election of President Barack Obama with lawmakers faced with addressing what’s become known as the fiscal cliff.

Investors should also be “careful of the long-end” of the yield curve, El-Erian, chief executive officer of the world’s biggest manager of bond funds, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. Treasury Inflation Protected Securities are attractive, El-Erian reiterated.

Among a confluence of budget measures coming to a head at the end of year that’s been referred to as the fiscal cliff is the expiration of tax cuts for income, dividends and capital gains. Most income from municipal bonds is exempt from federal taxes and often from local taxes, allowing muni bondholders to shelter income.

If Congress does nothing, 82.9 percent of U.S. households would face tax increases averaging $3,701, according to the Tax Policy Center, a nonpartisan research group in Washington. More than 98 percent of households earning more than $50,000 a year would pay higher taxes, the group said.

Treasuries rose following the election results, with 10- year yields falling the most in five months, as Obama’s victory over Mitt Romney bolstered speculation the Federal Reserve will stick to its policy of buying bonds to support the economy.

Fed Policy

Bernanke is likely “relieved,” El-Erian said. “He understands now that he has more scope to continue with his unusual activism. The alternative was that Governor Romney would get elected and he would name someone to replace Bernanke and that the markets would question guidance language, would question QE3, would question his commitment to keep his foot on the accelerator.”

The 10-year yield fell as much as 12 basis points, or 0.12 percentage point, the biggest intraday drop since May 30, to 1.63 percent before trading at 1.64 percent at 11:50 a.m. in New York, down 11 basis points.

The Fed began in September purchasing $40 billion of mortgage bonds a month in its third round of so-called quantitative easing, known as QE3, as gains in U.S. employment remain below levels needed to lift the pace of economic growth. The Fed also through the rest of this year in a program known as Operation Twist is exchanging $667 billion in short-term debt for longer-maturity securities to help contain borrowing costs.

‘Best Friend’

As well as announcing purchases of mortgage-debt, policy makers said in September they would probably hold the federal funds rate at about zero at least through mid-2015.

“The Fed will continue to be investors’ best friend, and maybe even investors only friend at this stage,” El-Erian said

Bill Gross, Pimco’s founder and co-chief investment officer with El-Erian, said in a “Bloomberg Surveillance” interview on Nov. 2 that the Newport Beach, California-based firm was wagering on the Fed’s actions causing inflation by purchasing inflation-index bonds.

“We think that you avoid a fiscal cliff through a mini bargain, not a grand bargain,” El-Erian said. “Which means you limit the contraction from about 4 percent of gross domestic product to contractionary of about 1.5 percent. And you do it in a less disorderly fashion. We still believe the higher probability event is to avoid the fiscal cliff.”

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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