Last week, Warren Buffett said Berkshire Hathaway would be ending insurance on some $8 billion worth of muni bonds, leaving many investors scratching their heads, wondering if Buffett knew something they don’t.

But Van Eck’s senior municipal strategist and portfolio manager Jim Colby recently told IndexUniverse’s Correspondent Cinthia Murphy that Buffett’s exit likely points to the improving health of the muni market rather than to its deterioration. What’s more, he said that when it comes to fears of default given the current capital constraints many municipalities are facing, what a handful of California cities have taught us so far is that when it comes to bankruptcies, contagion is largely overrated.

Van Eck manages more than $1.6 billion in muni ETF assets, half of which are linked to the firm’s Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD).

Murphy: The financial crisis is now five years old. Unemployment rates remain somewhat elevated. How impaired is the government’s capacity to raise funds, and how is that affecting the performance of munis?

Colby: Without downplaying any aspects of the recession, we’ve been for quite a ride in municipals as an asset class. We went through two significant downturns: the end of 2008 and end of 2010—the first when the recession was recognized and the latter when there was no evidence of a recovery at a time when [banking analyst] Meredith Whitney came out and warned about defaults in munis, saying they were the beginning of the next wave of the U.S. economic crisis. That fostered an environment of fear and questioned the viability and creditworthiness in the space. What followed were massive outflows from all muni products.

But we finally had a return to sanity by mid-2011, when investors realized that much of what she said wasn’t coming to pass. Consequently, we saw a very strong last quarter for munis in 2011 and a solid first half of 2012. Assets have continued to come back to munis and we are now facing demand that’s outstripping supply, producing strong valuations.

Murphy: So it seems there’s no growing doubt over the government’s ability to raise capital, even as we’ve witnessed a handful of towns already announce plans for or even file for bankruptcy?

Colby: We are going to see downgrades and bankruptcies, and that is the natural order of things in the context of a recession. But on balance, the muni market is a very deep marketplace with a rich history of repayment. Even if in the short term we see a handful of defaults, history has shown that, longer term, solutions can be found to repair and repay. Munis have a better rate of recovery than bonds in the corporate space, approaching rates as high as 70 percent. Investors’ comfort level seems to be more in evidence despite the bumps in the road, and I see little difficulty for most all issuers gaining access to the capital markets right now.

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