Q&A: Go Easy on the Munis

Joe Deane has been investing in the municipal bond market for more than 33 years, and has an enviable record managing the $3 billion Smith Barney Managed Municipals Fund. Through Nov. 29 this year, it returned 6.5%. He spoke recently with Senior Writer Robert Barker:

Q: Should investors be trimming their muni-bond positions?

A: This is not a time for people to try and hit home runs in the bond market. Interest rates are the lowest we've had in 48 years, and they could back up some. That's why I think you'd rather be a little bit more conservatively positioned in the bond market.

Q: So, no bets on long-term bonds and their heavy exposure to the risk of higher rates. Which bonds, then?

A: If you're going to be buying individual bonds yourself, you should probably buy them somewhere between 3 and 10 years in maturity. If you're going to go way beyond that in terms of maturities, I think you'd be far better off in a well-managed bond fund. It's just going to be much more conservatively positioned.

Q: How do investors get into trouble when they buy muni-bond funds?

A: When you get down to where we are today--in very, very low interest-rate environments--people still want yield, so they have a tendency to buy funds that use a lot of leverage to give them the additional yield that's really not in the marketplace. It's one of the telltale signs that I look for as a potential sign of a top in the bond market.

Q: Do you see that happening now?

A: Yes.

Q: What's a realistic expectation for investors in intermediate-term munis?

A: In terms of [annual] total return, you're looking at 4%--your coupon, and maybe a teeny bit more.

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