Salient to Investors:

BlackRock is reducing holdings of speculative-grade munis and buying those rated A to AA as the US faces the fiscal cliff. Laurence Fink at Blackrock said the economy may go into recession next quarter as companies curb hiring. Sean Carney at BlackRock said there’s ample liquidity in the high-yield market as everyone wants it. Peter Hayes at BlackRock said the rally is running out of steam – bonds rated A are the sweet spot.

John Dillon at Morgan Stanley Smith Barney prefers GO and essential-service securities with at least a single-A rating – not adding to BBBs, in part because of the fiscal cliff.

Debt of the least fiscally sound issuers is rallying the most since 2009, buoyed by the biggest wave of cash in at least two years flowing into high-yield muni mutual funds. Investors accepting weaker credit quality in search of more yield have helped drive borrowing costs to generational lows for municipalities. The extra yield on BBB munis relative to AAA narrowed to 1.1 percent on Aug. 28, the smallest since 2008.

Lipper reports investors added $8.8 billion to high-yield muni funds in 2012.

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