Aug 13, 2012|
Peter Hayes from BlackRock municipal bond group
Transcript - Not for consumer use. Robot overlords only. Will not be accurate.
Well gold is up ninety cents an ounce at 1621. Is expected yield on the ten year treasuries one point 64%. You know a lot of people. Consider and use municipal bonds within their investment portfolios and you know what you need to be a little more careful today -- you may have been in the past. We're joined now by Peter Hayes he's had a black rocks municipal bonds group Peter good morning welcome to the show. -- -- thank you great to be here. Peter like -- talk to you about credit risk. Research on meaningful to us up -- 510 years ago I never worried about it and it worried about the credit risk on Muni bonds because they are insured and you said you know how it's not a good ball the -- start -- of default action and we're seeing some bankruptcies. You know pat -- guys do this kind of research. I think it's a great point you actually touched dotted and the coaches say -- credit research in this market and that aspect is that isn't what it used to be and is a couple reasons for that one is that obviously the market. Before the credit crisis was largely in short market probably 55 to 60% of the market was back like some kind of Tripoli rapper. That's largely gone away and now you really have to look at really what the -- The creditworthiness of the you're sure when you're making investment in the -- markets so that a lot of things that that go into that and it depends on. The -- Structured type of debt you're looking differences there's -- bombs and because again example a couple of us chooses to yield bonds based on the full faith and credit of Massachusetts which is a lot of different means that they can use. To pay off their debt like. Like raising taxes or raising fees that that's that are up. And and then there's revenue bonds which obviously for instance those taken the -- facilities the payment of -- on -- upon them. Relies upon. Public polls are are collected so that'll literally a lot that goes there it is very very complicated process and complicated more because the market is just. It's so that in this so many different structures and -- Ponce. No you know Meredith Whitney figures about a year and a half ago two years ago came out and said they're going to be hundreds. Of municipal bond default was she wrong or was she just currently. I think long in the in the -- you know it is a lot of we along with a lot of other people have raised some of the issues obviously the credit crisis put a lot of strain on state and local governments. And that wasn't a surprise we're seeing issues with pensions for instance and we're wee bit difficulty balancing the budget could revenues hopeful and social dramatically from the recession so a lot of those. Point identified by others and by her as well. The problem was the mail the hundreds and even hundreds of billions of dollars that -- talked about. Virtually impossible in in the market. The market is very as I mentioned but a lot of these local municipalities only make up about 13% of the market. And if you only have on average about forty million dollars of debt outstanding so if you put that into the hundreds of billions of dollars contacts. You really would've taken thousands of of the defaults and bankruptcies to a -- which I think we have much -- systemic problems with that that was the issues and no we're not worried about these. One of the widespread I think the the amount was greatly over them. -- I talked to a Fella he's the state treasurer appears names Steve Grossman and if you've done any business with him or not Peter but. I was asking him about the pressures. Of you know balancing budgets we have a 44 billion dollar -- -- we have a 24 billion dollar underfunded pension liability here in Massachusetts he tells me that you guys not. Black rock in particular but bond rating agencies and in the bond companies. But lot of pressure on the states to start to get their financial affairs in order is that true you guys eat you guys walk in and say well we're not gonna buy that bond. And the -- clean up your fiscal lacked. We do it might not -- that is not so. Direct but we actually to deal with that with -- she was obviously including the -- McConnell there and we there's a lot of different things -- of that and we do our analysis and we decide whether we're getting. Rewarded for taking certain types of risks or not. It was a matter of I think the borrowing cost that they don't get their fiscal house in order whether be in terms of budget or whether in terms of tensions. Then clearly they get penalized either by the access to the markets or in higher borrowing costs of different ways they can manifest itself in that sense. The market -- put pressure on them to have a better balance -- to be more proactively in regards to their fiscal situation. Are you seeing the municipalities start to get it together I mean we had a modest amount of pension reform here in Massachusetts. And other parts of the country. Are you seeing municipalities. Fire state workers reduce police officers firefighters teachers and modify their pension plans in order to get their budgets in order. It's a really really great point there there is a lot of pension reform which has been taking place at that perhaps -- happening across the country and it's happening at an accelerating pace. Obviously it's very painful to those who are affected and it's politically very difficult to implement. But unfortunately it's also important for long term. Viability standpoint in terms of these different issue is different credit goes I would also say -- a little bit of a distinction between municipalities which a while because of the cities and local governments and and what happens at the state level they obviously have a lot more means come wolf actually has. A fairly good good. They have pension situation regarded. -- relative to many other states across. The country but clearly any type of pension reform. And the ability to reduce what they call this unfunded liabilities. That they can be problematic. It it's gonna take some time and but do you the fact that we are seen -- pension reform happening at accelerating pace. Does that we help it's been a little bit more difficult at the local level I think that's why -- mean particularly for instance in California you've seen some of these bankruptcies that's not really about the ability to pay there. They're dead it's really about high fixed cost structures and pension benefits that they are actually are attempting to renegotiate. Throughout this process. Are you -- much in the way California bonds the year he's -- there from. Well I'd -- lot of largely. California is very big very important economy here in the United States also very diverse economy. And there are many good credits include the commonwealth. There's also a lot of revenue cubicle in the state. But many revenue bonds within the state also that we -- very strong credit again that stress is gonna manifests itself at the local level. And that's were largely stayed away from California. All right Peter thanks a lot for joining us I hope you'll come back today. Look -- -- river Trout and that's Peter Hayes head of black rocks municipal bond group and with a message there and and they took the lesson to learn areas that. If that towns and municipalities. Get their financial affairs in order instead of having to borrow the money at 8% -- or would it 23 -- don't accident that -- Peter was saying in a roundabout way but. That's why it's critically important that you know how your town is managing its financial instantly from -- chime in earlier now we can't yeah you need to know this because. If you can't if you have a lousy bond rating. Or your town is spending too much money. He can't borrow money or he can't borrow it at a reasonable cost you have to basically. Tighten your belt and by tightening your belt you go from having an 8% mortgage and your town down 2% more worthwhile. Would be back with more on the financial exchange.