“There have been 20 quarters in a row of increased state tax receipts,” said Davern.
Muni bonds also yield more than Treasury bonds, he said. Defaults in the muni bond market are rare, even though Detroit’s default made headlines. Out of a $3.7 trillion market, less than one-tenth of 1 percent defaulted in 2014, and as of 2015 there has been only one Chapter 9 filing.
Davern advised investors to do their homework when buying muni bonds if they are concerned about default risk. Nuveen prefers revenue bonds over general obligation bonds.
One area where many investors are underweight is in global bonds, said Yan Zilbering, investment analyst at Vanguard.
The best way to invest in global bonds is by hedging out the currency risk, which is something that is much cheaper to do now than it was in years past. Once currency risk is hedged, the volatility is reduced and the return on global bonds is similar to that of U.S. bonds, Zilbering said.
He pointed out that currency-hedged global bonds performed as well as U.S. bonds did during the global financial crisis, offering downside risk protection.
Finally, he said, since the early 2000s, the cost to hedge currency has fallen by about 50%.
“This is why these bonds have become much more appealing,” he said.