'Extremely Low'

"Given the extremely low" Treasury yields, "high quality munis offer a great alternative for a short-term investor looking for yield. Period," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. Pollack said he has been buying munis for clients who usually only hold Treasuries. "Investors are better off in the muni market where you can get yield at more than 100% of Treasuries on an absolute return basis with similar credit risk."

Besides munis being undervalued in historical terms, the world's biggest money managers say Treasuries are overvalued. Bond investors expect consumer prices to rise 2.16% a year, based on the difference between yields on 10-year Treasury-Inflation Protection Securities, or TIPS, and similar maturity Treasuries. That's up from 1.51% in August.

Bill Gross, who oversees the world's biggest bond mutual fund at Pacific Investment Management Co. in Newport Beach, California, says the 30-year bull market in Treasuries is drawing to a close because yields can't fall further after the Fed pushed borrowing rates to all-time lows.

Investors who want to add risk and take advantage of the muni premium may purchase two-year California notes that yield 1.08%, or more than double the 0.51% yield on comparable maturity Treasuries, according to Bloomberg data.

"Treasuries have gotten very expensive," said Jeffrey Schoenfeld, a partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. "Quantitative easing has had the effect of pushing down yields tremendously. Now you are better buying munis than Treasuries."


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