Focus on bond stories
Interview: Deutsche Bank---Pollack, Gary---Fund Manager
>> welcome back. the number of americans filing for jobless benefits fell below $400,000 this week. this is the first drop since early february. the labor department reports the number of claims unexpectedly fell to $386,000 in the previous week. economists consider the $400,000 level at the dividing line between an improving and worsening job market. some corporate executives see this as a job market heading for improvement.
>> we will be hiring quite a few people in order to beible to launch all our new products. effectively we are probably talking about several thousand additions over the next year and a half or so.
>> u.s. economy has lost $1.2 million --1.2 million jobs since november.
>> treasuries fell in today’s session driving 10-year needles to a 10 month high after the jobless report. gary pollack, portfolio manager, private bank wealth management.
>> first of all i have to talk about the top bond storyt now is this california debt downgrade. give us a sense on the size and scale of what this means. first of all, to california and then we can move into the rest of the market.
>> this is a huge development for california and it’s a major slap in the face to california. normally when rating agencies downgrade state credits they move in very little steps. california was single a earlier today. now it’s bbb. the small step s&p could have taken was take it down to a minus. they did not. they took it all the way down to bbb. it’s a huge downgrade and a major development.
>> at a minus a lot of holders can continue to hold it. at bbb they have to lose it. give us a sense of what that’s going to mean for these bonds.
>> for the investors who cannot hold a bbb rated bond in their portfolio, tomorrow morning they may have to go and sell the bond. what happens is when bonds come out for the bid for sale, the yields on these bonds rise relative to other bonds to make sure that the bonds can be sold. so you could see california bonds underperform the market even more than they have already.
>> do you have a sense, can we even have a sense as to how many of the holders that currently hold these bonds would be likely some sort of percentage to have to sell them, or is that too hard to say?
>> that’s too hard to say. i’ll point out here, this bottom graph here shows the spread of california yields relative to everybody else. you can seettes gone from just 40 basis points not too long ago to almost 75. i wouldn’t be surprised to see this go even higher over the next couple of weeks.
>> because of changes to the dynamic as to who can own it and what it’s going to yield.
>> absolutely.
>> let’s―do you think other states are going to follow with this? they certainly have similar problems with their budget. they don’t have similar problems when it comes to the recall election and some of these other issues.
>> correct.
>> but is this some sort of warning shot from s&p saying these other states have to get their budgets in order or they face a similar thing?
>> most other states when they face revenue shortfalls because of economic softness, take necessary steps to put their budgets in balance. and for the most part, states have done that. california is one of the few exceptions here in that their fiscal year started on july 1st, and they still don’t have a budget. on top of that is this recall by the governor which creates a lot of uncertainty and turmoil regarding the state’s budget outlook.
>> are events like the credit reduction like this, could they be seen by some as a buying opportunity.
>> i certainly feel that way. i have not bought cal g.o. bonds for a long time. i’m waiting for something like this to happen, because i do think in at the end of the day california will pay principal and interest in a timely fashion.
>> any other ka kaegss on the corporate market as a whole? california, a huge economy, massive amount of float. what are we talking about.
>> the municipal market has been a lot safer and did not have the credit problems the corporate market had during the past recession. this could be an omen or harbinger that the muni market is going to suffer the same credit issues the corporate market is facing.
>> how do you stand as far as investments in munis now? what are you looking at? what’s most attractive to you?
>> believe it or not we like municipal bonds, we thought it was one of the more attractive sectors in the fixed income markets, especially at the short end of the yield curve. i’m talking about one, two, three year maturities.
>> why short end as opposed to a longer?
>> if you look at muni yields relative to treasury yields over a long-term basis, those yields are about 70 or 80% of u.s. treasuries. today they are closer to 100% so you are getting almost the same exact yield in u.s. treasury and you are getting it fully tax exempt. we thought that was a good deal.
>> what do you think of the treasury market? you take a look at the 10-year right now. what’s your expectation right now? hovering around 4%? you see a situation now 4.16%? do you expect to see a great deal of movement in the six to nine months.
>> over the next six to nine months, yes, i do. i would think rates rise over the next six to nine months because i think the economy is% -pgoing to do better, i think inflakes expectations could change. the last thing is the supply of treasury debt. the c.v.o. said the budget deficit will be $450 million. that’s a lot of bonds to sell in the marketplace.
>> gary pollack, thanks for your quick analysis of this breaking news. much more still to come. coming up next we’ll update you on the latest earnings news on the world’s biggest paper and lumber maker.
