That being said, for those capable of doing credit risk in the municipal market, particularly with tax increases likely on the way, municipals make sense so long as you can withstand the interim volatility. Below, I will highlight the asset classes that I have mentioned before, and you should be able to see for yourself that finally, folks are being compensated to take credit risk.

Whether or not they are cheap and getting cheaper, I will say this: The stock market will have great difficulty performing unless spreads tighten, so equities are out of the question, except for a trade here or there, until the credit markets thaw. One other problem for equities is that since bonds now offer “equity like” returns or higher, cash may be siphoned away from equities into fixed income. Ultimately, this could lead to even more relative pressure on equities.

High Yield Corporate Spreads

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Municipals versus Treasuries (now 123.6% of Treasuries)


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Historical Perspective of Corporate Yield Spreads


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Historical Yield Spread between 30 Year GNMA 6 ½% versus 5 year Treasuries


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Summary: Bonds a Better Option

I'm fortunate to be an absolute return investor. I'm not tied down to performing in line with any particular benchmark. In fact, I ask myself daily, “in the absence of a benchmark, what would you buy”?

I hope that this short analysis drives the point that, as absolute return investors, my firm has chosen Mortgage Backed Securities over stocks and Treasuries, as I feel they possess the best absolute return risk/reward characteristics. Corporates are cheaper than equities, and I doubt that neither the economy nor stocks can recover meaningfully until credit spreads begin to behave.

So for investors with benchmarks, corporate, junk and municipals make a lot more sense than stocks. This clearly beats a market of stocks, where we are grasping for what the “E” in P/E is and a dividend yield of 3% that will likely drop as either prices fall, dividends are cut, or likely a bit of both.

As always, if I'm wrong, my firm will still make 6-7% with no credit risk and loads of liquidity, relatively speaking. And above all, if I'm wrong, I will have lost opportunity, not precious, hard-earned capital.