Muni-Bonds Do Well Despite Scandals

Its amazing that with the battering the muni-bond market took and is taking over black box deals as well as its connections to the derivatives market that it has ended up being one of the safest places to park your money and is coming off a banner year in 2009. From the Bond Buyer:

Many of the biggest institutions that own municipal bonds beefed up their holdings last year as state and local government debt became something of a preferred asset.

The 100 Largest Institutional Holders of Municipal Bonds
The 500 Largest Municipal Portfolios at U.S. Banks

Vanguard Group, Franklin Templeton Investments, and Nuveen Asset Management — the three biggest institutional holders of municipals according to Thomson Reuters eMAXX — all added healthily to their stocks of muni bonds.The three cater heavily to retail investors through products like mutual funds, closed-end funds, money market funds, and separately managed accounts.

Vanguard Group overtook Franklin Templeton for the number one spot among institutional holders, boosting its holdings by 28.2%, to $79.8 billion.Vanguard runs 13 municipal bond mutual funds, plus six tax-free money market funds and a variety of retirement funds and other accounts.

Franklin Templeton slipped to number two, with a 13% increase to $70.4 billion. The firm runs dozens of mutual funds, including state-specific funds, and a handful of money market funds.Nuveen leapfrogged American International Group to claim the third spot after an 8.7% bulk-up in holdings, to $53.7 billion.

Some of this would be Obama's move to make muni's more attractive and the ensuing creation of the Build America Bonds program has been a godsend to many financial houses:

Brandon, who runs Eaton Vance's BABs fund, said taxable municipal bonds appeal to a number of types of investors who have long been interested in state and local government debt but had no reason to buy it because the tax exemption kept yields too low.Taxable municipal bonds open the market to pension funds, 401(k) accounts, and foreign investors, Brandon said.

The newfound foreign interest in U.S. state and local government credit further highlights the role institutions play in managing municipals for clients, Brandon said.An investor in Hong Kong or Switzerland may never have heard of the New Jersey Turnpike Authority or the Los Angeles Unified School District, so he is more likely to trust an institution to sort out municipal credits, Brandon said.

Chase in particular has aggressively acted in the market and increased its bond holdings to 3.5 building. In other words even after numerous municipalities were burnt by sketchy bond deals the financial houses involved are making a fortune off muni-bond advice. ( For the record I believe the majority of bond deals are straightforward, but how can one decipher the good from the bad at this point?)