Q&A: Where can you find yields right now?

John Flahive, senior vice president and director of fixed-income at BNY Mellon Wealth Management in Boston, manages $20 billion in municipal bonds. Flahive exchanged e-mails for an interview in today's issue of the Bloomberg Brief: Municipal Market newsletter.

Q. Where can you find yield right now? Or, are you sitting on cash, waiting for yields to climb higher at some point?

A. We are still finding good values in A rated and lower investment-grade municipal bonds such as BBB. The continuing concern about the credit quality of municipal bonds has hampered demand for lower investment-grade securities but we are selectively finding opportunities that offer historically attractive relative yield in those categories.

Q. Have recent downgrades affected value, or is the market beginning to discount rating company opinion?

A. Most of the recent downgrades have occurred in sectors that are heavily dependent on federal government support, directly or indirectly, such as pre-refunded municipal bonds or even some state general-obligation products. However, the downgrades were mostly focused on securities that were once AAA rated and lowered to AA+ rated by Standard & Poor's. The magnitude of such a downgrade and corresponding market sensitivity has been minimal. We believe that the rating companies' reputation is damaged by their role in the grading of mortgage-backed securities, yet they still have impact and are still relevant.

Q. Do you think we'll see a return of the municipal-bond insurance business?

A. No, not any time soon. The only one that is underwriting much at all is Assured Guaranty and I don't think they are likely to penetrate much beyond where they are at, about 10 percent.

Q. Are there any states you are avoiding now?

A. No, We don't categorically avoid a state -- rather we evaluate bottom-up the individual securities; yet we also recognize that certain states or regions are under pressure and therefore we take extra caution with those.

Q. Will a bankruptcy by Jefferson County, which is still a possibility, have any impact on the market?

A. Yes, initially it could lead to continuation of redemption from municipal-bond funds. But after the shock wears off I think the market will compartmentalize Jefferson County as a situation that's unique both from a fiscal and political perspective.

--Editors: Walid El-Gabry, Pete Young

To contact the reporter on this story: Joseph Mysak Jr. in New York at jmysakjrbloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannenbloomberg.net