In a recent interview with Bloomberg (video below) bow-tie wearing linguistics lover and bond market expert Jim Grant made it quite clear he’s not a buyer of municipal bonds. Instead, he likes certain REITs specializing in the purchase of mortgage backed securities, some of which are pretty good businesses he thinks and offer yields north of 10%.
Grant, who’s been following the bond markets for decades, writes a newsletter on the subject, Grant’s Interest Rate Observer. His caution today doesn’t stem from a Meredith Whitney-style expectation of multiple municipal defaults. (He calls that kind of pontificating, even when he’s doing it, “stargazing”.)
What Grant doesn’t like about munis is the same thing other experts have bemoaned: their low yields. He doesn’t profess to know whether Whitney is right or not, but he knows that if inflation begins to crank, investors will “just lose money every day because interest rates are going up.” In short: what you’re getting out of these bonds, won’t be enough to cover inflation let alone get you some additional return.
Three and four-percent yields are “Pygmy yields, at a time that the Federal Reserve is telling us that is intends to create enough dollar bills to lift our prices and to restore a kind of prosperity. To me the considerations about default are besides the point of the question of risk,” he says. “It’s not a buying opportunity. These yields are too small to compensate you for the risk of trouble.”
As a potential alternative, Grant offers mortgage REITs. Two he mentions as having good pre-tax yields and being well managed are Annaly (NLY) and MFA Financial (MFA). There are risks in these names too, he says — particularly if short term rates go up since that will hike their borrowing costs. As companies that borrow short to buy these mortgage-backed securities, that’s a problem.
It’s worth watching the video below just to see the delight with which this long-time market watcher describes “Mr. Market” variously as “impish” and ” a prankster” and the gold standard as “exquisite”. This man loves his job.
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