RICH BERNSTEIN: People Become Visibly Disappointed When I Tell Them About The Best Investment Opportunity In The World

Bill murray golf disappointed sad distressREUTERS/Robert GalbraithActor Bill Murray drops to his knees after making a putt at the 13th hole during the third round of the Pebble Beach National Pro-Am golf tournament in Pebble Beach, California February 10, 2007.

“Somebody asked the other day what the world’s best investment opportunity is, and when I told him he was visibly disappointed,” said Rich Bernstein of Bernstein Advisors.

Bernstein was talking about high-yield municipal bonds.

Investors in the bond market currently prefer investing in Iraq than U.S. municipalities.

As of July 23, Republic of Iraq bonds due in January 2028 were yielding 7.08%; high-yield municipal bonds in the U.S. were yielding 1.9% more.

That spread implies that investors think Iraq is less likely to default than some U.S. municipalities.

This fascinating stat, shared by Bernstein, highlights why high-yield municipal debt, or “munis,” is what Bernstein calls the best investment opportunity anywhere in the world.

“Everybody thinks every municipality is going bankrupt,” Bernstein said at a recent breakfast attended by Business Insider. “It’s just not true. We’re going through a very normal cycle in municipal finance. An accentuated cycle, admittedly, but a normal cycle.”

Municipal defaults, which have been in the headlines in recent years following Detroit’s bankruptcy and continued concerns over the health of Puerto Rico’s finances, peaked two years ago, said Bernstein.

Municipal defaults were partly triggered by pressure from declining tax revenues and underfunded pensions. Bernstein noted, however, that with U.S. 10-year Treasury bonds yielding 1.35%, which is where they were in the summer of 2012, “it would have been a miracle to see public pensions overfunded.”

But as the cycle turns, Bernstein said, and tax revenues increase, interest rates increase, and asset values in pensions funds increase, all improving the financial health of a municipality.

Municipal bonds can also offer investors another incentives, as interest earned from municipal bonds is often tax-exempt.

Even leaving out this benefit, however, at least one advisor sees an obvious investment opportunity right here in America.

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