Despite record-low yields and growing concerns about the health of many U.S. local governments, Citi analyst Vikram Rai believes investors should still be buying municipal bonds. According to Rai, the situation is far from ideal, but municipal bonds offer advantages over other fixed-income investments that make them worthwhile.

U.S. municipal bonds can provide tax-exemptions for qualified investors and alternatives for foreign investors trying to escape negative yielding local debt.

Rai admits that at first glance, the risk/reward balance of many municipal bonds at current yields doesn’t seem very compelling. However, Citi sees no catalyst for higher yields or steeper curves.

Rai sees a potential pension crisis ahead for many municipalities, but he believes investors have gotten prematurely spooked by recent headlines. He added that being right too early can be the same as being wrong.

“The pension story is a slow paced tragic tale and in most cases the risk of non-payment is far from imminent,” he explained.

He admitted…

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