NEW YORK ( TheStreet) -- Most fund managers agree that economically strapped Puerto Rico won't drag down the municipal bond market. Neither will Chicago, which recently saw its debt downgraded by Moody's below investment grade, according to Dawn Daggy-Mangerson, portfolio manager for the McDonnell Intermediate Municipal Bond fund.
"Chicago's problems will not affect the overall muni bond market but other states and municipalities within the nation are going to be facing similar issues and some are dealing better with it than others," said Daggy-Mangerson. "At McDonnell, we like to look at each credit from the bottom up and it's pretty transparent which municipalities and states are going to deal with it better that others."
The McDonnell Intermediate Municipal Bond fund is down almost 1% so far in 2015. The fund has a trailing 12-month yield of 1.3% and Daggy-Mangerson expects it to perform well in a Fed-tightening environment because they are more insulated from global interest rate risk. A bigger factor for her is issuance.
"One big thing that affects the muni market is supply, and this year we've seen record the amount of supply, about 50% greater than last year," said Daggy-Mangerson. "But it is predominantly from refinancing of existing debt. So if we see higher rates that supply is going to dry up and municipal bonds are going to hold it better."
Daggy-Mangerson is bullish on the hospital sector because of the uncertainty - and higher yields - resulting from Obamacare.
"It adds a little bit more yield but there's a wide number of securities that you can choose from in the hospital sector that have great value," said Daggy-Mangerson, adding that she is also positive on a number of higher education issues.
"There's a lot of quality institutions to choose from," said Daggy-Mangerson. "What we look for in the McDonnell municipal bond fund, are more the flagship universities where they have a very diverse revenue stream. It could from endowment revenues, student fees, but they're very solid institutions, but you can get a little more yield than a plain vanilla water and sewer bond."