NEW YORK (TheStreet) -- Municipal bond funds may be feeling slightly the effects of negative headlines coming from Puerto Rico's financial problems. Set those aside, and the market looks both inexpensive and attractive, said Tom Metzold, Senior Portfolio Manager for Eaton Vance.
"When you look at it compared to Treasuries and other fixed-income investments, it's still pretty cheap," Metzold said. "And the supply-demand dynamic is still pretty positive in the sense that more bonds are getting called, redeemed and matured than there are new bonds getting issued."
Metzold oversees the Eaton Vance High-Yield Municipal Income Fund, which is up 30 basis points year-to-date and yields 4.24%, according to fund-tracker Morningstar. Metzold will be leaving Eaton Vance after 28 years as a money manager to lead MBIA's secondary-markets business. He said his experience in the industry helped him get out of problematic uninsured Puerto Rican bonds early on.
"We still own some insured Puerto Rico because we believe the combination of the fundamental return on what you are going to get plus your insurance is going to be money good," Metzold said, adding he still expects the market to be a "roller coaster ride."
Metzold said the bond insurers are making a comeback after losing their AAA status in the wake of the financial crisis. In fact, he said, most of them have money for paying claims in excess of what they had before the financial crisis, based on the old ratings criteria.
"A lot of people are looking at Puerto Rico and are thinking it's going to be the death knell of the insurers," said Metzold. "I don't think that's going to be the case at all. I do think there is still value there."
The big question, of course, is whether municipal bonds will keep their advantage over Treasuries once the Federal Reserve starts raising rates. Metzold said he would not be surprised to see municipal bonds outperform Treasuries once the Fed starts lifting rates, which in his view will be in 2016.
"If you go back to the last time the Fed raised rates, which was in June of 2004 through June of 2006, the Fed raised rates 17 times for 425 basis points," he said. "Municipal long-term yields declined. People wonder how that can be. Well, one of the reasons the Fed raises rates is because the economy is getting better and stronger. That's good for municipal bonds, who generate revenues through taxes."